By: Mason M. Jones, CFP®, Advisor
As the saying goes, April showers bring May flowers. While the trees continue to bud and flowers bloom, families and businesses across the country continue to struggle with COVID-19 uncertainty.
The CARES Act made its way through Washington quickly and covers a lot of ground. The $2.2 trillion deal was far from perfect however, it does contain provisions allowing an unusual amount of unique planning opportunities. They relate to current rules around early withdrawals, loans, and Required Mandatory Distributions (RMDs). I will touch base on a few opportunities around RMDs.
Once you reach age 72 the IRS mandates that you take a certain amount of money out of your 401(k) or IRA every year because all good things come to an end. In other words, it is time to pay the IRS back for the previous tax breaks (pre-tax contributions and tax deferred gain on earning) but if you are subject to an RMD in 2020 the CARES Act includes a waiver allowing you to suspend taking the distribution in 2020.
If you were subject to an RMD in 2020 you should consider the following:
- Under the CARES Act, 2020 RMDs are waived
- If you reached your Required Begin Date in 2019 and were waiting to take your first and second RMDs in 2020, you can suspend both RMDs this year
- If you meet the criteria for a Coronavirus-Related Distribution, you can complete a rollover to return any unwanted 2020 distributions, within three years of such distributions
- If there is a trust or estate that is a Non-Designated Beneficiary of a retirement account and subject to the 5-Year Rule regarding distributions, the CARES Act allows you to disregard 2020 for purposes of calculating your distribution timeframe (essentially creating a special 6-Year Rule)
What planning opportunities are at play?
- By suspending your RMD you are allowing:
- More time to recover the losses
- Further income tax deferral until at least 2021 whereas you would most likely be withdrawing a greater percentage of your account and pay tax on a value that no longer exists because the calculation is based on the prior year ending account value (Dec. 31st 2019)
- Suspending your RMD may make sense because they can push you into a higher tax bracket and increase your Medicare Part B and Part D premiums for the year
- If you have already taken your 2020 RMD, in whole or partial, you can return any unwanted distribution by making a 60-day rollover (this does not apply to beneficiaries of inherited accounts and not related to the CARES Act)
- If you took a whole or partial RMD in January or February, there is an expectation that the IRS will be providing guidance in order to allow individuals to return their RMD (no guarantees)
- Down markets and low tax rates present an opportunity to convert an IRA to a Roth so you should look closely at your situation because when the market rebounds you’ll enjoy tax free earnings and distributions
- RMD cannot be converted to Roth but since there are now no RMDs it is worth a look
- A conversion will lower the balance subject to RMD thus lowering future tax bills
- Roth IRAs are not subject to RMD so they can pass to your beneficiary income tax free
- You can still use your IRA to get a tax break on giving to charity
- A qualified charitable distribution (QCD) from your IRA
- Funds are directly transferred from your IRA to a charity (must be a qualified charity) and excluded from income
The bottom line is RMDs are waived for 2020 but you can still take them as you normally would to sustain lifestyle expenses or take advantage or some of the planning opportunities I mentioned above.
*Taking advantage of these potential planning opportunities will depend on individual circumstances. Please reach out to Mason M. Jones, CFP®, Advisor at (607) 936-3785 ext. 270 with any questions.