How Does the CARES Act Impact RMDs in 2020?

Federal law requires individuals to take a required minimum distribution, or RMD, from their qualified retirement plans. The policy goal behind requiring people to take a certain amount of money out of their retirement accounts is so that the IRS can tax income. For example, every time a retiree takes an RMD from an IRA or traditional 401(k), the IRS considers that money as ordinary income and will tax that income as such. 

Engaging in Estate Planning Can Save You Money

Taking the time to use the rules surrounding RMDs to your advantage can help you save more or your hard-earned money. Every time we put money into a 401(k), traditional IRA, or SEP-IRA, we gain tax advantages. The recently passed federal CARES Act changed the rules regarding when we are required to take minimum distributions out of our tax-advantaged retirement accounts. 

The CARES Act Has Suspended Required Minimum Distributions for 2020

The federal government has waived required minimum distributions for most retirement accounts in 2020. In doing so, they are hoping to provide relief to retirees and give their investments more time to recover from our volatile stock market. 

In other words, you are not required to take required minimum distributions from your 401(k), IRA, 403(b), and 457(b) retirement accounts. This waiver applies to everyone with one of these types of retirement accounts. Even those who own inherited IRA accounts may suspend their RMDs for 2020. 

Changes to the Required RMD Age

Prior to the CARES Act, individuals were required to begin taking RMDs when they turned 70.5. Now, retirees do not need to take RMDs until age 72. If an individual turned 70.5 in 2019, he or she will have needed to take an RMD by April 1, 2020. Retirees can skip their 2019 RMD and their 2020 RMD as long as they had not made an RMD by April 1, 2020, and it was their first year making an RMD. 

Converting Your RMD to a Roth IRA

You can take the amount of money that would have been your RMD this year and convert it to a Roth IRA. Keep in mind that any amount of money that is a pre-tax amount that you roll into a Roth IRA will be taxable. Be sure to request that the rollover into a Roth IRA is coded as a ROTH IRA conversion. In fact, you can roll the funds you took out for your RMD into any eligible retirement plan. 

What Happens If You Already Took Your RMD Before the CARES Act?

If you already took your RMD before the law passed in March, you may be able to roll that money over into a workplace retirement account or an IRA. You need to act quickly, however and must roll the money over within 60 days of the distribution, and you can only do this once a year. 

What Are Coronavirus Hardship Distributions?

The CARES Act also allows for penalty-free hardship distributions from IRAs or 401(k)s. If you are facing health issues or financial hardship due to the coronavirus pandemic, you could be able to take a penalty-free distribution from your IRA or 401(k). Doing so will save you a 10 percent penalty on the amount of money you withdraw. 

Contact Our Experienced Estate Planning Lawyers Today

If you’d like to take advantage of the changes brought about by the CARES Act, Surprenant & Beneski, PC is here to help. We successfully work with clients in Southeastern Massachusetts, helping them create estate plans that allow them to keep as much of their hard-earned income as possible. Contact us today to schedule your initial consultation. 

©Surprenant & Beneski, P.C. 35 Arnold Street, New Bedford, MA 02740, 336 South Street,   Hyannis MA 02601 and 45 Bristol Drive, Easton MA 02375.  This article is for illustration purposes only.  This handout does not constitute legal advice.  There is no attorney/client relationship created with Surprenant & Beneski, P.C. by this article.  DO NOT make decisions based upon information in this handout.  Every family is unique and legal advice can only be given after an individual consultation with an elder law attorney.  Any decisions made without proper legal advice may cause significant legal and financial problems.