Knowledge and Insights
Breaking News!! The IRS announced that anyone who already took a required minimum distribution for 2020 from IRA accounts now has the opportunity to roll those funds back into a retirement account. The normal 60-day rollover period for RMDs already taken this year has been extended to August 31, 2020 to give taxpayers more time to take advantage of this opportunity. This does not apply to inherited IRA RMD’s.
The Coronavirus Aid, Relief and Economic Security (CARES) Act provides relief provisions pertaining to retirement accounts. While temporary, this has created the opportunity to take advantage of planning that can benefit individuals many years into the future.
Required Minimum Distribution Changes
Required minimum distributions (RMDs) generally start for a retirement plan April 1 of the year after the owner reaches age 70 ½ (or age 72 for those who reach 70 ½ after 2019 due to changes enacted by The SECURE Act). The CARES Act has suspended RMDs from IRAs and defined contribution plans for 2020. This suspension applies to anyone with an RMD, without regard to immediate impact of the coronavirus on the individual. This suspension provision will help to preserve the funds in accounts, allowing for an additional year of recovery from the recent volatile stock market.
RMDs that have already been taken out may be rolled over within 60 days of the distribution. If an individual made their withdrawal in the beginning of the year and the 60 days has already passed, they will be unable to put the money back into the retirement plan and it will be treated as a withdrawal and therefore taxable in 2020.
Access to Retirement Funds Before Retirement
The CARES Act was designed to provide relief to individuals who are struggling with the economic, emotional and physical toll caused by COVID-19. Eligible individuals directly impacted can withdraw up to $100,000 during 2020 for coronavirus-related purposes, without the 10% early distribution penalty.
Eligible individuals include those who (a) are diagnosed with COVID-19; (b) have a spouse or dependent (or qualifying relative such as a parent) diagnosed; (c) experience financial losses due to quarantine, furloughs, layoffs, reduced work hours, being unable to work due to lack of child care or closing a business that is owned and operated by the individual due to COVID-19, having pay or self-employment reduced due to COVID-19, or having a job offer rescinded to start date for a job delayed due to COVID-19.
These qualifying distributions will be included in gross income ratably over a three-year period, but the individual could elect to be taxed on the entire distribution in 2020. Individuals may recontribute the amount withdrawn within three years of the distribution. Individuals can file amended tax returns for the prior years when taxes were paid on the ratable portion of the distribution included in income. The repayments will be treated as an eligible rollover and not subject to tax.
Roth Conversion Opportunity
The down financial markets resulting from COVID-19 make this a good time to consider a Roth conversion. If an individual chooses to defer their RMD this year, that creates an opportunity to use that empty category of income for a conversion. The stock market hit left much lower traditional IRA balances which means lower tax costs when converted. When the market and the assets in the accounts recover after conversion, individuals can withdraw the increased account value tax free or choose not to take distributions, which are not required with Roth accounts.
We are also in a historically low tax environment. The current rates are expected go up in the future, reverting to pre-Tax Cuts and Jobs Act rates in 2026, if not sooner. If an individual expects their tax rates to increase in the future, it is beneficial to consider a conversion when rates are low combined with a year when a taxpayer’s marginal federal tax rate may be lower as well.
Roth IRAs are also excellent estate planning vehicles. The SECURE Act of 2019 now requires the beneficiary to withdrawal the full amount of the plan with 10 years of inheritance. With all withdrawals being tax free from a Roth account, the beneficiary can hold the account for 10 years, allowing for an additional 10 years of tax-free growth.
If you are contemplating foregoing your 2020 RMD and/or have been impacted by COVID-19, feel free to reach out to us to discuss the retirement provisions you have access to through the CARES Act. Additionally, please contact us if you are interested in discussing whether a Roth conversion is right for you.
DISCLAIMER: This advisory resource is for general information purposes only. It does not constitute business or tax advice, and may not be used and relied upon as a substitute for business or tax advice regarding a specific issue or problem. Advice should be obtained from a qualified accountant, tax practitioner or attorney licensed to practice in the jurisdiction where that advice is sought.