The Coronavirus Aid, Relief, and Economic Security Act (CARES) was signed into law by the President on Thursday March 26, 2020. This sweeping stimulus package was passed in response to the economic threat caused the COVID-19 pandemic. The CARES Act has many different sections, but, in this blog, we are going to focus on the changes to all 2020 Required Minimum Distributions (RMDs). Keep an eye out for future blogs covering more topics.  

Required Minimum Distributions (RMDs)

Everyone aged 72 and over is required to take an RMD each year from their Individual Retirement Account(s) (IRA(s)) or their companies’ qualified plan(s). The RMD is the tool our government uses in order to generate tax revenue, to make sure people start withdrawing pre-tax money from tax-sheltered accounts while they are alive. When folks initially put money into their employer’s qualified plan or IRA account, they receive an upfront income tax deduction for those contributions and, over the course of many years, that money grows tax deferred. The government provides this incentive purely because it wants people to prioritize saving for their retirement. 

When a person takes an RMD, that money is withdrawn from their tax-sheltered accounts; all the money that is withdrawn shows up on their tax return as ordinary income. At first, the withdrawals are low (starting at approx. 3% of the account value) then they continue to increase over time. 

The IRS provides what is called a life factor table, which helps individuals calculate their RMD for that year. The way someone determines how much to take out is by dividing their 12/31 previous year account balance by the factor the IRS provides based on their age. 

Let us take Mark as an example. He is turning 80 years old on 12/24/2020 and his 12/31/2019 IRA account balance was $100,000. Based on Mark reaching age 80, his RMD factor is 18.7. So, his RMD for tax year 20202 is $100,000 / 18.7 = $5,347. 

CARES ACT: Changes

• In passing the CARES Act, the government has suspended RMDs for tax year 2020 IRAs, inherited IRAs and defined contribution plans. But there might be very good reasons for someone still to withdraw money from their IRA account. For instance, they might want to take advantage of doing a Roth Conversion, they might be in a low tax bracket now and anticipate that their taxable income will go up substantially in the future, they might have no other accounts to draw from to make up the shortfall between current expenses and current income, or a host of other reasons. If you do not fit into any of the above categories, it might make sense to delay distributions from your sheltered accounts—this way, you continue to defer income taxes.    

• Based on the language in the CARES Act, the government is not going to make folks take two lots of RMDs in 2021 (making up for this year); in essence, everything will remain the same except people can skip their RMDs in 2020. In 2021, taxpayers will use the next factor according to their age to calculate their 2021 RMDs. 

• If you have already taken your RMDs for tax year 2020, you might have an opportunity to do what is known as a 60-day 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. Please note this option is not available for inherited IRAs.

The rub is related to any tax withholding you sent to the IRS from your withdrawals at the federal and state level. If you have already taken an RMD in the past 60 days, you would need to come up with the gross distribution amount (tax withholding and net distribution) from an outside account and transfer that back into your IRA. If you do not have the outside funds to account for any tax withholding on the initial RMD, you can still transfer money back into your IRA but you will most likely get a modest refund in 2021 when you file your 2020 return. The transaction needs to be coded as an IRA rollover and you need to verify that this has been coded correctly with the institution that holds your investment accounts. 

If you have completed an IRA rollover within the past 12 months or you withdrew money from your IRA accounts more than 60 days ago, you are not eligible for this strategy. You may, however, be eligible to classify the withdrawal as a Coronavirus-Related Distribution (CRD). Similar to relief that has been provided to individuals in federally declared disaster areas in the past, the CARES Act has created CRD. Up to $100,000 of CRDs can be placed back into an individual’s retirement account all at once or over a 3-year period. If individuals want to keep the distribution, they can spread the income over the next 3 years to lower the tax bite. Current guidelines for qualifying all revolve around an individual’s family contracting or business being impacted by the virus. However, further guidance is expected to come from the IRS, to broaden the criteria for qualifying. Luckily, there is no time limit on any distribution taken in 2020 qualifying as a CRD.  

The CARES Act contains many other provisions that impact people’s lives. We strongly encourage you to have a discussion with your tax specialist and financial professionals to learn more about the other changes that might affect your personal situation. If you have additional questions or want to discuss how the CARES Act might impact/benefit your family, please feel free to call us at 305-448-8882.