CARES Act Allows Retirement Account Owners NOT to Have to Take Required Minimum Distributions (RMD’s)
If you have a retirement account you’ve most likely experienced fluctuations in your retirement balances due to the coronavirus (COVID-19) but rest assured there is some pandemic relief for retirement accounts. This year, you aren’t required to adhere to the normal mandatory withdrawal requirements, commonly known as required minimum distributions or RMD’s.
According to Federal law, if you were age 70½ before 2019 ended, you would have to take your required minimum distribution from your retirement plan in April of the year after you turn 70. However, if you were younger than 70½ by year end 2019, you can wait to age 72 before taking your RMD’s. The value of the account at the end of the previous year determines the overall amount of distribution although the funds withdrawn are considered taxable income in the year the distribution is taken.
Since the onset of the pandemic, the market has rebounded but is not quite what it was at the end of 2019 leaving many retirement accounts depleted to varying degrees. Required minimum distributions for 2020 would be based on the value of the account at the end of 2019 when the stock market was very high resulting in more money in the account.
Waiver of Required Minimum Distributions
The coronavirus relief bill, known as the federal CARES Act, waives the RMD requirements for both non-Roth IRA’s and 401(k) accounts which allows retired individuals to retain more of their savings.
Recognizing this, the CARES Act waives the requirement for individuals taking RMDs from their non-Roth IRAs and 401(k)s in 2020. This includes any 2019 distributions that would otherwise have to be taken in 2020. Waiving RMDs will allow retirees to retain more of their savings, regardless of whether it’s from your own account or for those inheriting retirement accounts.
Generally, it is considered a good idea to not take a withdrawal if you do not need to because leaving the money in the account allows it to continue growing tax deferred. Taking a withdrawal can also increase your 2020 tax burden. However, there are circumstances where it may make financial sense to take an RMD, for example, if you need the money to live on. In addition, if you know you are going to be in a much lower tax bracket in 2020, but expect your tax bracket to increase in 2021, it may make sense to withdraw the money earlier so you can pay taxes on the withdrawal at a lower rate.
If you already took an RMD, you may have the option to either return it to the account it came from or a different retirement account. Usually RMDs cannot be rolled over into another account, but because the CARES Act waived RMDs, they are considered voluntary distributions. This means they can be redeposited or rolled over into a new retirement account (including a Roth account) as long as you do it within 60 days. The IRS has provided guidance, waiving the 60-day rule if you took an RMD between February 1 and May 15 as long as you roll over the RMD by July 15, 2020. This type of rollover can only occur once per year, so if you rolled over a distribution within the previous 365 days, you cannot do it again.