The recently-enacted Coronavirus Aid, Relief, and Economic Security (CARES) Act provides $2.0 trillion of emergency financial assistance to Americans affected by the COVID-19 pandemic.
Retirees stand to gain significant relief from CARES Act provisions related to Required Minimum Distributions (RMDs). Under the Act, these RMDs are waived for 2020, effective retroactively to January 1, 2020.
RMDs are the minimum amount the IRS requires you to withdraw each year from your IRA accounts, 401(k)s and other tax-deferred retirement savings plans. Traditionally, you must begin taking withdrawals when you reach age 72, or 70 ½ if you reach that age before January 1, 2020. (Roth IRAs are treated differently and do not require withdrawals until after the death of the owner.)
The RMD relief provided by CARES is extensive and applies to almost all defined contribution plans. This is a critical piece of the legislation as many Americans are struggling under the weight of the pandemic. Added flexibility on distributions is beneficial, as the markets have been incredibly volatile. Thanks to CARES, retirees can give their retirement portfolios another year potentially to rebound and recover.
The relief also applies to beneficiaries of retirement accounts taking stretch distributions. These beneficiaries are typically required to empty the account within five years of inheritance, or to take periodic distributions based upon life expectancy, depending upon when inherited. The CARES Act adds an extra year to that deadline.
There’s even better news for those who turned 70½ in 2019 but chose not to take their RMD until the April 1, 2020 deadline. Under the standard IRS rules, these folks would have had to take two RMDs in 2020. CARES waives both distributions.
While RMDs are deferred for 2020, voluntary distributions are, of course, still allowed. These include the option of Qualified Charitable Distributions (QCDs) for IRA owners and IRA beneficiaries age 70½ or older. So, account holders can still make good on their charitable pledges.
If you’ve already taken your RMD for 2020, the Act allows you, under specific conditions, to return unwanted funds from the distribution.
If you have taken an RMD within the last 60 days, you can roll this money over if it came directly from the 401(k) to the IRA, or if you use the once-per-year rollover rule. This rule is applicable because no IRA-to-IRA rollover has been made within the past 365 days, or because the RMD came from a defined contribution plan or is going to a plan. In this case, you can transfer cash equal to the RMD back into a retirement account so long as it’s within the 60-day rollover period. You also might convert the amount into a Roth IRA.
Those who took their 2020 RMDs more than 60 days ago can still return the distribution if they can show COVID-19 has impacted them. To make that case, one of the following must be true:
- The individual has been diagnosed with COVID-19.
- A spouse or dependent has been diagnosed with COVID-19.
- The individual has experienced financial difficulties as a result of quarantine, furlough, being laid off, or reduced work hours due to the virus.
- They are unable to work because they lack childcare.
- They own a business that has either been closed or now operates under reduced hours because of the virus.
- They have some other circumstances that the IRS deems acceptable.
If any of these criteria are met, the rollover can take place any time within three years of receipt of the distribution!
The only downside to CARES’ treatment of RMDs is that, with one exception, it doesn’t allow for inherited IRA RMDs that have already been taken to go back into a retirement account. That exception is if you are a spouse and can claim a COVID-19 impact or 60-day window.
One final note on CARES and RMDs: It does carry impact for non-designated beneficiaries who inherit an account from decedents who pass away before reaching the required beginning date.
Typically, there is a five-year rule that applies to these beneficiaries, such as charities, estates, and non-see-through trusts. The standard rule is that these beneficiaries must have distributed the full amount of the inherited assets by the fifth year after the decedent’s death. The Act allows 2020 to be excluded from these five years, making it effectively now a six-year rule.
This extension does not apply, however, to those beneficiaries under the new ten-year IRA rule from the recently passed Setting Every Community Up for Retirement Enhancement (SECURE) Act. That’s because 2020 is the first year that a person who died could have left a beneficiary subject to the ten-year rule. Since this rule doesn’t take effect until the year after the account holder dies, 2020 won’t count as one of the ten years.
Economic uncertainty caused by the COVID-19 pandemic is a major stressor for all Americans, especially retirees. The CARES Act’s allowances on RMDs could provide retirees with at least a small sense of security, and for that, I applaud our government leaders.