The newly enacted CARES Act has suspended Required Minimum Distributions (RMDs) from retirement accounts for 2020, including inherited retirement accounts. This measure will provide some financial relief to those who do not need to take withdrawals from retirement accounts while the account values are low.
RMDs are calculated using the account holder’s life expectancy and the December 31st account balance from the previous year. Due to the recent market volatility, many retirement account balances have declined since the new year. Account holders now have the option to leave the funds invested in their retirement account to recover instead of withdrawing them.
For those who took their RMD before the CARES Act waived the RMD requirement, there is normally a 60-day window to deposit the funds back into your retirement account. It can only be used once in a twelve-month period for IRAs, but more than once for employer sponsored retirement plans such as 401(k)s and 403(b)s. If the IRA once per year rule rollover has been used, it may be possible to roll the funds into a non-IRA based retirement plan, e.g. 401(k) or 403(b) since those plans are not subject to the once per year rule.
On April 9th, the Internal Revenue Service extended the 60-day rollover window. Distributions taken between February 1st and May 15th may be deposited back into the IRA or retirement account until July 15th, 2020.
Even if you took your 2020 RMD before February 1st, it still may be possible to deposit it back into your retirement account. Other exceptions to the 60-day rollover/once per year rules are Coronavirus-Related Distributions, a new class of distributions (up to $100,000) that are eligible to be paid back over three years. The distribution must be because of one of the following: The retirement account holder has
- Been diagnosed with COVID-19
- A spouse or dependent diagnosed with COVID-19
- Experienced adverse financial consequences as a result of being quarantined, furloughed, laid off, or reduced work hours because of COVID-19
- Been unable to work due to lack of childcare because of COVID-19
- A business that closed or operated under reduced hours because of COVID-19
- Another reason approved by IRS
In addition, accounts with non-designated beneficiaries will get an extra year to distribute the account. The 2020 suspended RMD will essentially turn the 5-year distribution requirement to 6 years. Accounts with non-designated beneficiaries include charities, some trusts and other accounts with beneficiaries for which a life expectancy cannot be calculated.
And finally, the BIGGEST WINNER of all from CARES Act RMD relief…Account holders who turned 70.5 in 2019 and postponed their 2019 RMD to 2020 will get twice the relief! Instead of having to take two RMDs in 2020 as normally required after postponing, the 2019 and 2020 distributions are waived. Two RMD free years!
So, should you suspend your RMD in 2020? It depends. At Wingate Wealth Advisors, we review income and taxes annually and compare your current tax bracket to projected future brackets. We often uncover opportunities to “fill up” low tax brackets or for Roth conversions in low income years. A suspended RMD may create a low income tax year full of opportunities to take advantage of historically low brackets. Please let us know if you have questions or would like to learn how to optimize your low tax bracket years.
This post was updated to reflect IRS Notice 2020-23 which extended the 60-day rollover period.
Written by Andi McNamara, CFP® Director of Financial Planning at Wingate Wealth Advisors