On March 27, 2020, the President signed the $2 trillion stimulus package called the CARES Act – the Coronavirus Aid, Relief, and Economic Security Act. The primary purpose of the Act is that it boosts unemployment insurance payouts and aims to send relief checks to many Americans. The Act contains many important provisions that are designed to help American individuals and businesses deal with the financial crisis caused as a result of the COVID-19 virus. One of those is “No RMDs for 2020.”
What is an RMD?
RMD stands for required minimum distribution. Starting at either age 70 ½ (for those born before July 1, 1949) or age 72 (for those born after June 30, 1949), the government requires individuals to start withdrawing a set percentage annually of the balance and paying income taxes on the distributions.
The annual amount is determined by your age and the account balance of your retirement plan as of December 31 of the previous year. RMDs are required from all traditional plans (IRA, 401(k), 4013(b), etc) as well as Roth 401(k) plans. Further, inherited plans are generally subject to RMDs as well.
Individuals who fail to take a distribution could face a 50% penalty on the amount they should have withdrawn. This penalty is ongoing until the requirement is satisfied. The deadline for taking your RMD is usually December 31. However, your first RMD may be delayed until April 1 of the following year. It’s important to note that your 2nd RMD will still be do before the end of the year.
No RMDs for 2020
The RMD for 2020 applies to individuals with tax-deferred retirement accounts—including 401(k), 403(b), 457 and individual retirement accounts—who are subject to mandatory distributions. The same goes for beneficiaries who have inherited tax-deferred or Roth accounts, in which contributions are made with after-tax dollars and withdrawals are tax-free. Individuals with Roth IRA accounts in their own names are always exempt from RMDs. Whereas, in the case of inherited IRAs, beneficiaries who have not yet take an RMD in 2020 would not be required to take one.
The benefits of not having to take an RMD is twofold. First, since the required amount is based on the previous year’s ending balance, you are withdrawing base on a higher amount. As we all know, the markets were booming up until the Covid-19 pandemic. Account balances are way down this year. Therefore your RMD will be way more than you might want to take out. Also, requiring distributions during this time may not be the best PR move. People already have to dip in to their accounts and their finances may be in flux. Forcing people to withdraw money right now would not be a good look. The government did well making this a provision in the CARES Act.
RMD FAQ Due to Covid-19
What if I already took my RMD for 2020?
During the 2008-09 financial crisis, Congress suspended RMDs from retirement accounts and gave some who had already taken them the option to put the money back. It is expected the IRS will do the same in 2020. However, there has been no IRS guidance to date. Individuals who took required distributions since February 1 may not have to wait for the IRS to issue that guidance. They may be able to use the 60-day rule to return the money.
Obviously, if you haven’t take an RMD for this year, don’t do it. You may still withdraw funds from your retirement account. In fact, the CARES Act has made it easier than ever to access those funds. We’ll touch on that below.
What Happens if I Turned 70 1/2 in 2019?
If you turned 70 1/2 in 2020, you were supposed to begin your RMD regime. Starting with year two, RMDs must be taken by December 31. However, there is some leeway for taking your first distribution. Under normal circumstances, you can delay your first RMD until April 1 of the following year. By doing so, you would then have to take two distributions in the same calendar year. Usually it’s better to take your first RMD before the end of the taxable year. This allows you to pay the taxes during those two years, instead of just one.
However, there is good news for those who were waiting to take their first RMD. You no longer have to satisfy that requirement for 2019 OR 2020. Therefore, two RMDs have been waived for you. Keep in mind this is a one time thing. RMDs should resume in 2021.
How About Next Year’s RMD?
As of right now, it’s expected normal RMD rules will go back into effect. Retirement account owners will divide their Dec. 31, 2020 balance by their remaining life-expectancy figure in actuarial tables found in IRS Publication 590-B. You should still have until the end of the calendar year to take your RMD. The IRS will always get their share. However, it’s nice of them to delay that during these trying times.
Other Provisions of the CARES Act
As part of the CARES Act, there are a number of other important provisions that involve retirement accounts. For example, the Act offers penalty relief for distributions up to $100,000 from an IRA or 401(k) plan. In addition, tax can be paid over three years or no tax at all if the distribution is returned to a retirement account within three years. However, the individual must show that they satisfy one of the following conditions:
- an individual who is diagnosed with SRS-COV-2 or COVID-19 by a test approved by the CDC,
- whose spouse or dependent is diagnosed with one of the two diseases, or
- who experiences adverse financial consequences as a result of being quarantined, furloughed
Furthermore, one who participates in a 401(k) plan which contains a loan provision, can borrow up to $100,000. You will have five years to repay the loan. Payments do not have to begin until next year. Lastly, if you have an outstanding loan, payments for 2020 can be delayed for one year.
If you would like more information about the RMD rules for 2020 or any other provisions in the CARES Act, please contact us @ 800.472.0646. Also, you can check out our YouTube page for tons of educational videos dealing with the CARES Act, Self-Directed IRAs and Solo 401(k) plans. Stay safe and be well!