Required Minimum Distributions for 2020 Revisited
For traditional IRAs, prior to the SECURE Act, the first RMD was not required to be taken until April 1 following the calendar year in which the IRA owner attained age 70½. The SECURE Act changed that age to 72. For qualified plans such as 401(k) plans, the RBD is April 1 following the latter of the calendar year in which the employee attains age 72 or separates from service. For those employees who are also greater than 5 percent owners of the company, the RBD remains at age 72 even if they’re still working. There are no changes to the rules for Roth IRAs where RMDs are not required, but Roth 401(k) accounts do have RMDs. Note, however, that if you already reached age 70½ by December 31, 2019, you are still subject to the old RBD rule and need to take your first RMD by April 1, 2020, with a caveat, explained next.
The CARES (“Coronavirus Aid, Relief and Economic Security”) Act was signed into law on March 27, 2020. It was a historic bill featuring the largest economic stimulus package in American history. It also impacted RMDs that would otherwise be required in 2020 by waiving them.i
The waiver of the RMD for 2020 is a bit of a double-edged sword. On the one hand, due to pandemic-related financial difficulties, people may need to take money from their retirement accounts for living expenses. Remember, the RMD waiver doesn’t stop you from using your retirement assets as you see fit; it only imposes a minimum threshold for distributions. You can easily take more out of your accounts than the RMD. Hopefully, however, you’re in a position where you do not need the RMD to maintain your lifestyle needs because the thinking from Congress and the President is to allow you to avoid liquidating deeply depressed retirement investment accounts during a unique time of economic and market instability. So if you don’t need to liquidate retirement accounts, you may wish to give your account the chance to recover and to take advantage of tax-deferred growth.
If you turned 70½ last year, you could have taken your first RMD in 2019 or waited until April 1, 2020. If you didn’t take it last year, and planned to take it on April 1, 2020, in addition to skipping the 2020 RMD, the CARES Act also allows you to skip your 2019 RMD.
If you already took your RMD for 2019 and you didn’t really need it, under normal rules you would have 60 days to contribute the money back into an IRA as an IRA rollover. However, IRS Notice 2020-23 was published on April 9, 2020. This Notice extended any tax deadlines that were required between April 1 and July 15, 2020, to July 15, 2020. That means that if you took an RMD between February 1 (i.e., 60 days from February 1 is April 1) and May 15, you have until July 15 to roll the money back into an IRA.Note, however, that at the time of this Notice, the normal rule of only one rollover per 12-month period still applied (direct custodian-to-custodian transfers are NOT considered rollovers).
On June 23, 2020, the IRS issued Notice 2020-51, which extends the 60-day rollover period for any RMDs already taken this year to August 31, 2020. This includes individuals who turned age 70½ in 2019 and would have had to take the first RMD by April 1, 2020. Additionally, an IRA owner or beneficiary who has already received a distribution from an IRA of an amount that would have been an RMD in 2020 can repay the distribution to the IRA by Aug. 31, 2020. The IRS further clarified that this repayment is not subject to the one rollover per 12-month rule.
Conclusion
As you can see, while the CARES Act and subsequent IRS action provide a lot of assistance to individuals who don’t need their RMDs for living expenses, the rules are complicated. Be sure to check with your own tax and legal advisors about your individual situation.
Tax laws are complex and subject to change. The information presented is based on current interpretation of the laws. Neither Security Mutual nor its agents are permitted to provide tax or legal advice. This publication is intended for general information purposes and does not constitute legal or tax advice. This publication is not intended or written to be used, and cannot be used, for the purpose of avoiding penalties that may be imposed on the taxpayer under the Internal Revenue Code or any other applicable tax law. Clients should consult with and rely on their own independent legal and tax advisors regarding their particular situation.
i Note that qualified plan documents must be amended to allow for RMD waivers pursuant to the CARES Act.