Owners of IRA, 401(k) and similar retirement accounts are not required to take minimum distributions (RMDs) this year. Included in the massive 2 trillion dollar CARES Act are provisions that waive RMDs for 2020. The waiver raises some interesting financial planning issues and opportunities for account owners who would otherwise have been required to take taxable distributions.
Background
Once they attain a certain age, IRA account owners are required to start taking distributions from their account each year, unless it is a “Roth” account. The required minimum distribution (RMD) is based on the owner’s age and the account’s balance at the end of the prior year. In addition, heirs who inherit an IRA from someone other than their spouse may be required to take minimum distributions each year. To add confusion to this year, the rules governing the starting age and RMD requirements were changed by the SECURE Act effective January 1, 2020. For more on the rules under the SECURE Act see my article New Tax Law Changes Rules for IRAs.
The CARES Act and RMDs
The CARES Act (in Section 2203) suspends the requirement that retirement plan owners take distributions in 2020. The suspension applies to a broad range of retirement plan accounts including Traditional IRAs, SIMPLE IRAs, SEP IRAs, and 401(k), 403(b), and 457(b) plans. It applies to both older account owners and beneficiaries taking stretch distributions. The waiver applies to any RMD that was required in 2020 including distributions to account owners who turned 70 ½ in 2019 but had deferred their first RMD to April 1 of 2020.
Voluntary distributions are permitted from retirement plan accounts. So, it is basically up to you to decide whether to take a distribution in 2020. Of course, younger account owners need to be wary of early withdrawal penalties. But even those penalties have been eased by the CARES Act elimination of the penalty for “Coronavirus-Related Distributions” up to $100,000.
Planning
Under the CARES Act no one is required to take a distribution from their IRA this year. There are several advantages to skipping distributions such as:
- Distributions from non-Roth IRAs are subject to income tax. You can lower your tax burden for 2020 by taking no distribution.
- The money you leave in your IRA can continue to grow tax-deferred, hopefully making up over time for any losses suffered in the recent stock market slump.
- Taking advantage of your otherwise reduced income tax liability you can move money at relatively-low income tax rates to a Roth IRA via a Roth conversion. See my article Some Planning Ideas for your IRA for more on this planning opportunity.
On the other hand, there are good reasons to consider taking a distribution from your IRA this year even though it is not required.
- You may need the money to pay for basic necessities.
- With all of the stimulus spending taking place you may figure that tax rates are going to increase in future years. So, 20202 may be a good year to pull some money out of taxable accounts.
Its complicated. We can expect that the IRS will be issuing guidance over the coming weeks and months. You should discuss your particular situation you’re your trusted tax and financial advisors. And then let your retirement plan trustee or custodian know what you have decided.
