Changes To Required Minimum Distributions For 2020, Ep #3
2020 has been a crazy year, for sure. Many things have happened because of the COVID-19 pandemic that has swept the globe. The ripple effects are still being felt. The legislation passed by Congress to address the impact of the pandemic is multifaceted and impacts not only those who are retired or who are planning to retire soon, but also those who are beneficiaries of relatives’ IRAs.
This episode will highlight some of the most significant changes brought about by the CARES Act and the SECURE Act and will provide you with options you can consider for a variety of scenarios.
You will want to hear this episode if you are interested in...
The background of Required Minimum Distribution (RMD) [1:01]
How things are different for beneficiaries of these funds [6:57]
Understanding the Coronavirus related distributions provision [11:08]
RMDs (Required Minimum Distributions) do not follow traditional guidelines for 2020
To address the impact of the COVID-19 pandemic, Congress passed two pieces of legislation that have an effect on Required Minimum Distributions. Those acts are the SECURE Act and the CARES Act. These acts change the rules surrounding how and when individuals are required to take distributions from tax-sheltered investment vehicles.
Previously, at age 70 ½ at least 3.5% of your IRA or 401K balance was required to be distributed to you. In an effort to help with the tax burden such distributions could cause, the CARES Act has changed that required distribution age to 72. That means you can delay having to claim more income because of an RMD and perhaps keep yourself in a more secure financial footing until the COVID crisis is over.
What if you’ve already taken your Required Minimum Distribution for 2020?
It’s not uncommon for individuals who have to initiate their RMD to do so beginning in January of the calendar year, continuing to take set amounts out each month. With the changes brought about by these Acts, that may not be the best plan moving forward. But what if you HAVE already taken some or all of your RMD? What can you do?
Under the old rules, you would only have 60 days to roll the distribution you've received back into an IRA to avoid the tax implications of receiving it. But now, because of the pandemic, the IRS has released a notice that indicates that you have until August 31st to roll money back into the IRA it came from or to put it into a new one.
This applies to any RMDs from IRAs, 401Ks, 403Bs, SEPs, 457 Plans, Thrift Plans, and others.
The situation is different for beneficiaries of IRAs
The rules mentioned above do not apply to beneficiaries of IRAs. If you have taken your RMD as a beneficiary, you will have to pay taxes on it because you are not allowed at any time to roll that money back into an IRA that is not your own. That’s bad news for anyone who has taken out their entire RMD amount as a beneficiary. But if you have that RMD set to distribute money to you on a monthly basis, you can pause those distributions for the rest of the year to at least avoid having to claim the entire amount as income for 2020.
There is also a change to what has been known as the “stretch IRA” provisions. Previously, beneficiaries were allowed to stretch out RMDs for their entire lifetime. The 2020 COVID legislation has changed that. Now you only have 10 years to take your RMDs, at which point the account has to be completely empty. That means you will pay tax on each distribution when it happens. So consider your tax situation when deciding how you want to address this issue. If you’re still working you may not want to take the RMD now because it would add to your taxable income currently.
Strategies to reduce your tax burden because of RMDs
With these changes to the rules governing RMDs going into effect, many people are scrambling to do what seems best with their distributions. If you took any RMDs and decide that you don’t want that money to be counted as income for 2020, take action to roll it back into the IRA before August 31st (the extended deadline).
There is one exception to that August 31st deadline. If you were impacted directly by Coronavirus and it created financial hardship, you can take money out of your IRA, retroactive to January of 2020 and you can roll that money back into the IRA within three years, which is beyond the August 31st deadline of this year. But you have to be able to prove you were adversely impacted financially due to COVID.
Finally, you can donate your RMD directly to a charity or multiple charities. It will not be considered taxable income for you if you do and must go directly to one or more charities.
Listen to hear all the issues you should be thinking about when it comes to the changes recent legislation has made to RMDs.