Congress has enacted many tax law changes this year affecting qualified plans and IRAs. While the SECURE Act has created more permanent changes, the CARES Act brings some temporary relief to individuals affected by the Covid-19 pandemic. One area that has seen a lot of change recently is required minimum distributions (RMDs) for retirement accounts such as IRAs and 401(k)s.
SECURE Act’s effect on RMDs
By now, many of you are aware of the changes to RMDs due to the SECURE Act. One of these changes is that the SECURE Act raised the age that required withdrawals start from 70.5 to 72 years old. The SECURE Act also eliminated the ability to stretch inherited retirement accounts over the lifetime of whomever inherited it. Now, the retirement account must be completely withdrawn by the end of the 10th year following the death of the original owner.
CARES Act effect on RMDs
The CARES Act, which was passed more recently than the SECURE Act, suspends the RMD requirement for most retirement accounts in 2020. If you are not in an immediate need for money, consider leaving your required minimum distribution in the IRA so it can continue to grow.
What if I already took my RMD earlier this year?
You may have taken out their RMD for 2020 before the CARES Act was passed. If you took your distribution between February 1 and July 15, you can rollover the amount to your IRA. Unfortunately, if you took your RMD in January you cannot return it.
Other planning opportunities:
- Consider doing a Roth IRA conversion. You can convert your traditional IRA to a Roth IRA. You will need to pay income tax on the amount converted in the year of the conversion. However, your beneficiaries can then withdraw from the Roth IRA without paying income taxes. This works best if you have the funds outside the IRA to pay the tax.
- Coronavirus related distribution: The CARES Act allows for a new feature called a coronavirus-related distribution (CRD) which allows individuals to take distributions from a retirement account and avoid the early withdrawal 10% penalty tax as long as they meet certain criteria. An individual can make a CRD withdrawal up to $100,000. If this amount is repaid within three years, it will go back into the retirement account as a tax-free rollover.
Be careful about choosing this. You may find it difficult to pay back if the economy does not improve as much as you hoped. If you cannot pay it back, then you will pay income tax.
These can provide valuable opportunities to you. As we continue to wind our way through this pandemic, please stay safe and consider your families welfare as well.