The Coronavirus Aid, Relief, and Economic Security (CARES) Act became law in late March in response to the ongoing and increasing threat of the coronavirus. It was a sweeping stimulus bill that was passed as the economy came to a halt because of government-mandated shutdowns. You may have read about this massive bill (and subsequent ones) and the various provisions that are contained within it. Rather than repeat all of the highlights, I will focus on changes to the 2020 required minimum distribution (RMD) rules.
Required Minimum Distributions
As a reminder, once you reach age 72, you are required to take an RMD each year from your employer’s qualified plan (assuming you are retired) and/or your IRAs. This was recently changed from 70.5 by the SECURE Act in late 2019, which itself was a major piece of legislation with significant changes for retirees. One major change in the CARES Act is the suspension of those RMDs for 2020. To be clear, unlike other provisions in this bill, it is not just a delay of the RMD (i.e., double the amount next year); it is a complete skip. In 2021, taxpayers will simply use the next age-based factor to calculate their 2021 RMDs.
Strategies For Reducing Taxes
The reality is that most people not only rely on their distributions for income, they also tend to take more than the minimum. Regardless, this provides quite a bit of flexibility for people who are able to take advantage of it.
It’s advantageous to defer income taxes and allow your account to grow tax deferred. For those retirees who were previously receiving some of their cashflow from RMDs, taking distributions from available taxable accounts might be a good way to save on taxes this year. Additionally, this might create a tax loss, which retirees can use to offset future gains. We generally don’t advocate selling portfolios in a down market, but if your overall investment plan can be altered to ensure your equity exposure stays the same, this strategy might be appropriate.
Having said this, there might be good reasons to withdraw money from those retirement accounts this year, other than needing the funds, as previously mentioned. There are a few reasons to consider doing this, including:
Doing a strategic Roth conversion.
If you’re in a low tax bracket this year and anticipate your taxable income going up in the future.
60-Day Rollover Provision
If you’ve already taken your 2020 RMD, you might have an opportunity to do what is known as a 60-day rollover. This 60-day rollover provision is not actually in the CARES Act, as it has been part of the tax code for some time. Under the terms of the 60-day rollover, you have to return the gross amount, not the net amount received after taxes.
Previously, RMDs could not be returned to an IRA so this provision wasn’t relevant. But with the removal of the RMD for this year, any funds taken from those retirement accounts become just an ordinary distribution, thus qualifying for the rollover. Assuming you have not done any other rollovers in the past 12 months, the IRS will allow you to transfer some or all of the money you withdrew from your IRA within the past 60 days back into your IRA in one transaction.
Exceptions To The 60-Day Rollover Provision
Please note, as with any new rules and regulations related to the tax code, there are many exceptions and caveats. Notably, non-spouse inherited IRA RMDs cannot be rolled over. While the CARES Act waived RMDs from both inherited traditional IRAs and inherited Roth IRAs (and as mentioned above, those would be normal withdrawals now), no type of withdrawal from an inherited IRA can ever be rolled over. And after the initial bill passed in March, further guidance was received from the IRS in April. If an RMD was/is taken between February 1 and May 15, and if that RMD is rolled over by July 15, 2020, then the 60-day rollover rule is waived. RMDs taken in January do not qualify for this exception, nor do any RMDs taken after May 15.
An interesting note: the last time the IRS waived RMDs was in 2009, and the 60-day rollover relief didn’t happen until later in the year. The moral here is to be calm and clearly evaluate your options, as changes happen quite frequently in these times, and we may yet see further guidance from the IRS that expands rollover options.
Be sure to follow all the rules before rolling over an RMD or any strategy related to the 2020 exception. Contact us to learn how the CARES Act and other recent changes might affect your personal situation.