The CARES Act states that RMDs for 2020 are not required, but should you take one anyway?
- Required Minimum Distributions are normally required annually
- CARES Act of 2020 does not require RMDs for 2020
CARES Act and RMDs in 2020
The Coronavirus Aid, Relief, and Economic Security, or CARES, Act of 2020, contained a number of provisions aimed at aiding US citizens, states, and corporations. The more than $2 trillion CARES Act aimed to provide fast economic stimulus to the economy and provide direct funds for individuals and families. In addition to the stimulus checks and Paycheck Protection Program, there is a measure that allows retirees to forgo taking Required Minimum Distributions, RMDs, from IRAs or 401(k)-type plans this year.
Required Minimum Distribution, or RMD, is the amount you must take out of your account to avoid tax consequences in a given year. If you turned age 70 ½ prior to January 1, 2020, your RMDs are based on age 70 ½, not age 72.
RMDs in 2020
For 2020, because of the CARES Act, no RMDs are mandatory. This is in marked contrast to previous years when RMDs were, by definition, required. For 2020, the CARES Act eliminated RMDs, as there was such a marked drop in investment account amounts. The new law allows retirees to keep that money in their accounts, potentially recouping some of the market losses when the economy turns back around.
Taking an RMD in 2020 is, as stated, not required. But there can be reasons why you might want to do so.
- If you need your RMDs to live off of, you will likely need and want to continue to take the distribution, or part of it.
- If your tax bracket will be higher in the future you may wish to take all or part of your distribution, as this can save you money in the long run.
- If you’ve already taken a distribution you will most likely be unable to return it to your account. Please speak directly to your investment and tax professionals for the most updated guidance.
- If you make an annual charitable distribution, you are permitted to continue to do so.
For 2019, the RMD is 4.37% of the December 31, 2019 balance for someone age 75. If the balance has dropped from $100,000 on December 31, 2019 to $73,000 now, the $4,370 RMD would be 6% of the current balance — much higher than Congress or the IRS intended.
The CARES Act is designed to help those who have lost money due to market volatility, and this can be used to your advantage. If you need money, you do not need to take the full amount of an RMD for 2020 either, but can take less. This makes sense if you need some of the money to live on, or if you are looking to limit your spending due to the financial upheaval currently working itself out.
Or, instead of taking money out that would represent a greater loss to your balance, you can choose to leave the money, in the form of a Required Minimum Distribution, where it is, for the market to recoup its losses, and hopefully replenish your account.
You could also choose to do a Roth conversion instead of taking a distribution. You could put the amount you choose to draw, $4,370 in the example above, in a Roth IRA.
Now that you know how to self-direct your account, let’s talk about a Roth IRA. Roth is named after Senator William Roth of Delaware. He believed there must be a better way for Americans to save for retirement, rather than spending their money haphazardly.
What separates a Roth from a traditional IRA is how you contribute (and distribute) from the plan. You fund a traditional IRA with pre-tax money. You get a tax-break on the amount you contribute, and taxes are deferred until you take distributions during retirement.
On the other hand, you fund Roth IRAs with after-tax money. While you don’t get an upfront tax break, all distributions during retirement are tax-free.
It’s Your Money
In 2020 especially, it’s important to make certain that you have a strong understanding of what your money is doing. Keeping an eye on your balance, the market, alternative investments, and anywhere else you’re keeping funds is vital.
Ultimately it’s a decision you have to make for yourself and your family, and your finances.