CARES Act: Retirement RMDs Suspended for 2020

Robert DowdApril 17, 2020

COVID-19 Related Information

On March 25th, the Senate approved the $2T economic stimulus package with 96 saying ‘aye’ and zero opposed. Only two days after the Senate approved the package, the House of Representatives approved the legislation and President Trump promptly signed the bill to make it official.

Within the bill, Congress suspended required minimum distributions (RMD) for retirement accounts, including inherited IRAs, for the calendar year 2020. Each year, account holders are required by law to take withdrawals from their IRA, SIMPLE IRA, SEP IRA, or retirement plans, such as a 401(k), once they reach 72 years old (70½ before 2020), or the first year they are a beneficiary of a decedent’s account.

When an individual is required to take their first RMD, they can delay that distribution until April 1 of the following year. Those individuals who delayed their 2019 distribution to 2020, will have that waived in addition to the RMD they were required to take in 2020. These account holders get a double relief for waiting to take their RMD from retirement accounts, which shows that waiting to the last minute can pay off!

As this may seem out of the ordinary to be included in the CARES Act, know that Congress has done this previously back in 2009 during the financial crisis. It is an effort to avoid requiring individuals to sell investments that may have fallen in value, which would lock in losses and require a greater percentage of the account to be withdrawn.

Individuals still can withdraw funds from their accounts, but there are no requirements that any RMD monies need to be withdrawn in 2020. We urge you to work with your advisor to discuss various tax planning opportunities that could be available this year.

  1. You may wish to take out a smaller amount from your IRA than were originally required.
  2. If there is a need for income, it may be beneficial for an individual to utilize other types of accounts, such as a taxable account (brokerage account), to allow the retirement accounts to continue to grow tax-deferred and take advantage of the more favorable tax rate of long-term capital gains or losses.
  3. Converting some of your IRA to a Roth IRA may also be a possibility. This would provide after-tax dollars which would grow tax-free in your Roth IRA.
  4. Gifting money to charity from your RMD is still a possibility through a qualified charitable distribution (QCD), where philanthropic individuals can transfer RMDs directly to a qualifying charity and exclude the donation amount from their taxable income.
  5. Our investment team will be looking for opportunities for capital losses within your portfolio. This could affect the RMD decision as well.

One other consideration needs to be discussed with your advisor. Many of our clients have used RMD to pay federal and state taxes. Even though you will be paying less taxes by not taking your RMD, you may need to make estimated tax payments to cover potential tax due on other investment income, social security, or wages. Your advisor will be working with our tax department to review the need to make any estimated taxes.

Please contact our office to discuss these tax planning issues with your advisor. We would like to help you or any of your friends, neighbors, or colleagues with these tax planning strategies. Please call our office at 610-651-2777.  We are here to help!