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The Coronavirus Aid, Relief, and Economic Security (CARES) Act was signed into law on Friday, March 27th. One provision waived required minimum distributions (RMD) in 2020 including:

  • 2020 RMDs from IRA, (including traditional IRA, SEP IRA and SIMPLE IRA) and retirement plan (including 401(k), 403(b) and 457(b)) accounts
  • 2019 RMDs due by April 1, 2020 for first time RMDs (if not yet taken)
  • 2020 Inherited RMDs by beneficiaries from IRA, Roth IRA and retirement plan accounts
  • 2020 RMDs as part of the 5-Year Rule applicable to Non-Designated Beneficiaries (e.g., charities, estates, non-See-Through Trusts)

The RMD waiver is beneficial because the 2020 amount is calculated from likely higher account values from December 31, 2019. If not for the waiver, one would be forced to withdraw and pay tax on a much higher percentage of an IRA balance. The waiver will help reduce 2020 taxable income and provide more time for potential tax-deferred growth.

Retirement account owners may benefit from waiving their 2020 RMD assuming the funds are not needed for living expenses. Retirement account owners who should still take a 2020 RMD may include the following:

  • Do not have any other resource to meet their cashflow needs
  • Would still be in a lower marginal tax bracket even if taking some or all of their 2020 RMD

Rolling Back Unwanted 2020 RMDs

If some or part of an RMD has been distributed and it is not needed for cashflow, one may have the ability to roll back the RMD. For example, if you received an IRA RMD in cash, you could write a check to deposit back into the IRA. It must have been received within 60 days and cannot have previously rolled back another IRA distribution within the last 12-month period. For example, if $5,000 was distributed from the IRA to a checking account on January 1, February 1, and March 1, only one distribution (March 1) could be rolled back in. If taxes have been withheld on the distribution, the full amount of the distribution ($5,000) should be put back into the account. Action should be taken as soon as possible given the time restrictions.

Those who have received 2020 inherited IRA RMDs may not roll them back unfortunately.

RMD Taken More than 60 Days Ago

The current rules state that a 2020 RMD may be rolled back within 60 days of receiving the distributions. Unfortunately, those that took a RMD in the early part of 2020 more than 60 days ago cannot roll back. Many in the financial press are touting the use of a Coronavirus-Related Distribution (CRD) as an alternative for those who have taken their RMD beyond the 60 day rollback window.

CRDs are distributions of up to $100,000 made from IRAs, employer-sponsored retirement plan (or a combination of both) made in 2020 by an individual impacted by the Coronavirus because they1:

  • Have been diagnosed with COVID-19;
  • Have a spouse or dependent who has been diagnosed with COVID-19;
  • Experience adverse financial consequences as a result of being quarantined, furloughed, being laid off, or having work hours reduced because of the disease;
  • Are unable to work because they lack childcare as a result of the disease;
  • Own a business that has closed or operate under reduced hours because of the disease; or
  • Meet some other reason that the IRS decides to say is acceptable.

CRDs are not subject to the 10% excise tax otherwise generally imposed on distributions prior to age 59 ½. In addition, income from a CRD may be reported for income tax purposes ratably over three years beginning with the year of distribution and may also be repaid to an IRA or another qualified plan during the three year period beginning on the day after the distribution was received. The thinking is that an unwanted RMD taken more than 60 days ago could possibly be considered a CRD and repaid back.

Our perspective is that using a Coronavirus-Related Distribution as a workaround for RMDs that cannot be rolled back may be an aggressive interpretation of the CRD unless one can demonstrate that they were impacted by the virus. Using a CRD is a possibility but we recommend consulting with a tax preparer whether it should be pursued or not. There may be additional IRS guidance shortly; thus, it’s likely best to act when there is more clarity on the use of CRDs for unwanted RMDs.

Instead, another option could be to convert assets distributed outside the 60 day period to a Roth IRA. While this will not avoid the tax cost of the distribution, the dollars can grow tax free and will not be subject to lifetime RMDS. A rollover to a Roth IRA does not count as the one 60-day rollover during a 12-month period.

Qualified Charitable Distributions (QCD) in 2020

IRA owners can still complete a QCD in 2020 from their IRA or inherited IRA if they are age 70.5 or older and send money directly to a qualified charity. However, since no RMDs are owed in 2020, the QCD will not offset any RMDs.

A few benefits of a QCD in 2020 remain: 1) a QCD still allows pre-tax dollars for charitable intent and 2) the IRA account has fewer shares after a QCD thus possibly reducing future RMDs.

Be sure to review whether a gift of appreciated stock is a better alternative than a QCD in 2020 given potentially lower taxable income from waived RMDs. In addition, the CARES Act lifted the 60% of AGI limit for cash donations made in 2020 to public charities other than Donor Advised Funds or Supporting Organizations. One’s tax preparer is the best resource to address this question.

To recap, the 2020 waiver of RMDs via the CARES Act presents a silver lining in the midst of the market downturn as the waiver will help lower taxable income and allow more time for tax-deferred growth to return. We at B|O|S stand ready to provide guidance to our clients on next steps.

Footnotes:

1. Jeffrey Levine, “Analyzing The CARES Act: From Rebate Checks To Small Business Relief For The Coronavirus Pandemic”, Kitces, March 27, 2020, https://www.kitces.com/blog/analyzing-the-cares-act-from-rebate-checks-to-small-business-relief-for-the-coronavirus-pandemic/

Filed under: Financial Planning

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