03 Jul 2020 Good News from the IRS

There’s been a lot going on in the world of retirement planning this year, especially when it comes to required minimum distributions (RMDs.) The passage of the CARES Act on March 27th meant that anyone normally required to take a distribution from their IRA, 401(k), 403(b) or governmental 457 plan was allowed to skip their distribution for the 2020 tax year. This included owners of inherited plans, too. In addition, those who waited until 2020 to take their required distribution that began in 2019 have had their distribution waived as well.

A required minimum distribution is the amount of money that must be withdrawn from certain types of retirement accounts once the owner reaches a certain age. As of 2020, the age that account owners must begin taking RMDs changed from 70 ½ to 72. At that point, the account owner must take a certain amount out of their retirement accounts (with a few exceptions) each year and pay taxes on the withdrawals. The account owner must then withdraw an RMD amount each subsequent year based on their current RMD calculation. All this because much of the money sitting in retirement accounts has never been taxed so Congress figured they needed a rule to ensure that they’d start to receive their tax dollars at some point.

The CARES Act 2020 RMD waiver was designed to provide retirees relief from having to pull money from their retirement accounts during a time when the stock market was down. It was particularly good news for those who do not need to take a distribution from their retirement plan for spending purposes but do so solely because it is required. For example, prior to the CARES Act, a 73-year-old that owns a traditional IRA that was worth $500,000 on December 31st of 2019 (the calculation is based on the previous year’s 12.31. account balance) would have needed to withdraw $20,242.91 sometime in 2020 and pay taxes on that amount. Now they can leave their $20k in their IRA to grow tax deferred and potentially have a lower 2020 tax bill.

The challenge for some people was that the CARES Act was passed late in the first quarter after many people had already taken all or part of their 2020 required distribution. Yes, there were some rules in place that offered some relief for those folks by allowing them to redeposit or rollover part of their distribution into a qualified retirement plan. However, the rules were complex and didn’t cover those who had taken their distributions very early on or who were taking their distribution on a monthly basis.

Fortunately, last week the IRS issued guidance (IRS Notice 2020-51) that cleared up any questions and unintentional omissions. Basically, the new guidance says that any amount of money taken as a 2020 RMD can be redeposited into a qualified retirement plan by August 31, 2020.

That’s it in a nutshell. You should pay attention to these rule changes if you…

…were planning to take your 2020 RMD later this year but don’t need the money for spending purposes. You might now leave the money in your retirement account.

…have already taken all or part of your 2020 RMD, but don’t need the money for spending. You might consider redepositing all or part of your distribution to a qualified retirement account.

…were planning to take your 2020 RMD later this year and you do need the money for spending purposes. You might consider pulling the funds from a different, more tax efficient account like a brokerage account or savings account.

…have already taken all or part of your 2020 RMD and you do need the money for spending purposes. You might consider redepositing all or part of your RMD to a qualified retirement account while simultaneously pulling enough from another more tax efficient account to cover the redeposited funds and your spending needs.

…find yourself in a particularly low tax scenario this year. You might still withdraw money from your retirement account this year even though it’s not required and you may not need it for spending.

…are interested in making a Roth conversion. The new rules potentially make conversions more attractive. Prior to the rule changes you had to take your RMD and pay taxes on the withdrawal before you could do a Roth conversion. Not so for 2020.

For some, making a decision based on the 2020 rule changes will be simple. For most, making a prudent decision will require some thought and research. Please let us know if you’d like to have a conversation about how the rule changes impact your options.

Note: the intent of this brief is not to offer tax advice. Please consult with your tax professional or financial advisor before making any 2020 RMD decisions.