The rules for RMD's [Required Minimum Distributions] have changed a lot in 2020 due to the SECURE Act [Setting Every Community Up for Retirement Enhancement] and the CARES Act [Coronavirus Aid, Relief, and Economic Security]
What's changed?
Well, you don’t need to take one.
What if I already Did?
If you already have, you may be able to undo it, per an IRS announcement this week. [read more below]
Wait, what is an RMDs?
RMD stands for required Minimum Distribution. This pertains to the mandatory amount a person must withdraw from their IRA [Individual Retirment Account] each year.
For some, an IRA has been a great way to save for retirement because your savings grow tax free. However, the government doesn't want you to never pay taxes so they created RMD's as a way of ensuring that you must take some money out of your IRA each year and pay taxes on that amount.
When do I have to take these RMD's
The SECURE Act Increased the Starting Age for RMDs from 70½ to 72 as of Jan. 1, 2020
Under the old rules for RMDs, you had to take your first required minimum distribution by April 1 of the year after you turned 70½. That rule was for anyone who turned 70½ by the end of 2019. The SECURE Act, signed by President Trump in 2019, made a big change to RMD requirements by extending the age from 70½ to 72. Which means your savings is able to grow for longer without paying taxes.
Under the new rules, if you turned 70 on July 1, 2019, or later, you didn’t have to take an RMD for 2019. Instead, you must take your first RMD for 2021, the year when you turn 72, by April 1, 2022.
What's different for 2020?
The CARES Act, signed by President Trump in 2020 waived RMDs Altogether for the 2020 Calendar Year which means you don't have to pay taxes on your IRA this ear.
A provision in the CARES Act allows retirees to skip RMDs altogether this year. It’s a one-time waiver of the annual requirement that retirees 72 and over withdraw a portion of their defined-contribution retirement plan — including a 401(k) or 403(b) plan, or a traditional IRA — and pay income tax on it. So, this year, if you don’t need to take a distribution, you can let your holdings sit untouched to weather the current market volatility.
In addition to the tax savings, since the stock market dipped a little due to the COVID 19 panic, not having to withdraw money right now could help your portfolio’s value when it goes back up.
If you’re like many people, though, you may rely on these distributions for your living expenses and can continue to take money out of your accounts as usual. But if you don’t need that full amount to cover your costs, the waiver gives you flexibility.
What if I already took my RMD?
You Can Reverse an RMD and Return that Money by August 31
The IRS announced on Monday, June 23, that you can reverse an RMD taken from an IRA and return that money by August 31 without taking a penalty or having to pay taxes. In other words, anyone who took an RMD in 2020 from an IRA has the opportunity to roll those funds back into their IRA until Aug. 31, 2020. This change applies to inherited IRAs as well. The funds must be returned to the account from which they were withdrawn. This new reversal rule does not appear to apply to other types of qualified retirement accounts, such as a 401(k) or 403(b), but stay on the lookout for an updated IRS announcement that might expand this reversal rule to these other plans.
The IRS states the following in the new announcement:
“In the case of an IRA owner or beneficiary who has already received a distribution of an amount that would have been an RMD in 2020 but for section 2203 of the CARES Act or section 114 of the SECURE Act, the recipient may repay the distribution to the distributing IRA, even if the repayment is made more than 60 days after the distribution, provided the repayment is made no later than August 31, 2020.
The repayment will be treated as a rollover for purposes of § 408(d)(3) of the Code, but will not be treated as a rollover for purposes of the one rollover per 12-month period limitation in § 408(d)(3)(B) and the restriction on rollovers for nonspousal beneficiaries in § 408(d)(3)(C).”
Read “IRS Notice 2020–51: Guidance on Waiver of 2020 Required Minimum Distributions” here.
RMDs Could Be Back to Normal Next Year
According to experts, the nation is recovering quickly, the stock market has risen again and if the recovery holds, RMDs could be back to normal next year.
If the rules for next year return to normal, your RMD will be an age-based percentage of your year-end 2020 balance.
However, it’s interesting to note that the the calculation for determining RMDs is scheduled to change in 2021. The Internal Revenue Service bases RMDs on life expectancy, and its proposed new Uniform Lifetime Table has been updated to account for longer life expectancy. The change will be close to imperceptible on your finances. For instance, in 2019 a 75-year old had an RMD equal to 4.37% of a retirement account balance. In 2021, using the new updated Uniform Lifetime Table, a 75-year old’s RMD will be 4.07%.
6 Moves You May Want to Consider with Your IRA
U.S. News recently recommended six moves you can consider making with your IRA, in light of the new RMD landscape, as follows:
- If you already took an RMD, consider reversing it: As mentioned previously in this article, you always have 60 days to reverse an RMD and return that money without taking a penalty or having to pay taxes, so if you can do so, it’s something to consider. And remember that for IRAs, you can return your distribution up until August 31, 2020.
- Do nothing and let your holdings recover after the market sell-off: If you don’t need to take a distribution, you can let your holdings sit untouched to weather the current market volatility.
- Take a regular distribution and convert it to a Roth IRA: In previous years a mandatory RMD could not be used to purchase a Roth IRA. [A Roth IRA is an account funded by after-tax dollars that lets earnings grow tax-free] however, a voluntary distribution can. So, with RMDs waived, retirees can take a regular distribution, pay the tax on it and use that money to fund a Roth IRA which means you won't have to pay taxes on money withdrawn from the Roth IRA. Retirees can fund the Roth IRA with the amount of money they would have otherwise taken as an RMD, or they can withdraw enough money to avoid going into the next tax bracket. It is wise to work with a financial planner on Roth conversions, and make sure you have enough money outside of your IRA to pay the taxes.
- Double-check if your retirement plan gets a waiver: The CARES Act waiver decision affects almost every type of retirement vehicle, but there are some exceptions with RMDs. The exceptions apply to 457 plans. If you work for a private company with this type of plan, you still need to take an RMD if appropriate. If you have a defined benefit plan that pays you a pension annually, those payouts are still required. Payments from annuities that have been annuitized fall under the exception. A final related exception are 72(t) distributions. Generally, if you take money out of a retirement plan before age 59½, there’s a 10% penalty. That penalty is waived if you take what’s known as a “series of substantially equal periodic payments.” If you take one of these 72(t) distributions, you still must continue it this year. You have to continue taking those, or risk triggering the penalty on all of your prior distributions.
- If you need the money, you can still make withdrawals: If you’re a retiree who needs to tap into your IRA to support your lifestyle, you should still take that money.
- Use charitable distributions to avoid future tax liability: Charitable distributions are one way people can fulfill the requirement to withdraw money from their retirement accounts without having to pay taxes on it. Please see today’s Critter Corner for more details about this.
Plan in Advance for Retirement
With the new RMD landscape and other changes in the law, the need for retirement planning and estate planning remains as important as ever.
Please note the above is intended for information only and is not to be construed as financial advice, tax advice or legal advice.
