The global coronavirus pandemic and the economic impact that followed brought changes we could never have predicted. In addition to adjustments made to our daily lives, many investors are making financial adjustments to adapt to the volatile market conditions. For those who have reached retirement, the uncertainty may be especially concerning.
To provide some relief, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) was passed into law by the federal government with a number of provisions designed to stimulate the economy. One measure particularly helpful for older Americans allows retirees to forego taking Required Minimum Distributions (RMDs) from their retirement plans in 2020.
A required minimum distribution (RMD) is the set amount of money a retiree must withdraw from a qualified retirement plan, including a traditional individual retirement account (IRA), Simplified Employee Pension (SEP) IRA, or Savings Incentive Match Plan for Employees (SIMPLE) IRA.
Under normal conditions, an RMD serves as a safeguard against people misusing retirement accounts to avoid paying taxes. The IRS sets RMDs based on the account’s overall fair market value at the end of the past year and the account owner's life expectancy. At any point, although an investor is required to withdraw this minimum amount, they can always withdraw more.
The rules are subject to change each year, but typically the withdrawal needs to happen by April 1 of the year after the retiree reaches a certain age. That age shifted from 70 ½ to 72 in 2020, but the rules changed again due to the CARES Act when the suspension went into effect for those who can afford to wait.
Why RMDs Are Suspended for 2020
As mentioned, under usual circumstances, the IRS sets the RMD amount based on your account’s value at the end of the prior year. But because of the drop in the market this year, most account values have declined sharply since December 2019. This would normally make required withdrawals a significantly larger percentage of the account’s overall value.
With the new CARES Act provisions, retirees can skip previously required payouts and keep the money in their IRA, 401(k), or 403(b). This will allow them to potentially recoup a portion of the possible market losses once the economy rebounds.
Who Is Eligible for a Waiver?
If you are a retiree already subject to RMDs, you are eligible for this waiver, no matter your age. You will need to consult the IRS rules for original retirement account holders and inherited-IRA beneficiaries, but it currently includes anyone who turned age 72 in 2019 (or 70 ½ in prior years) that would have normally had to take their RMD by April 1, 2020.
The waiver does not apply to defined benefit plans, such as pensions. So if you are required to take distributions from your defined benefit retirement plan, you will need to continue to do so in 2020. It also doesn’t apply if you take “substantially equal periodic payments” from your retirement account penalty-free, which is a different kind of distribution. To be clear, the suspension covers explicitly RMDs only.
If you are eligible for the waiver but already took your RMD in 2020, the IRS announced that the CARES Act allows you to roll the withdrawn funds back into a retirement account, but only until August 31, 2020, if certain conditions are met.
If you have any questions about your eligibility to skip payments, be sure to consult with your tax advisor.
Should You Skip Your Payment?
Allowing retirees to skip payments can be advantageous in that it provides a tremendous opportunity for them to recoup losses from the drop in the market. So if you do not need the money to live on, you may want to let it stay put.
If you've already allocated the RMD funds for living expenses and need the money, consider withdrawing cash from a taxable account rather than an IRA, assuming you have other available funds. Be sure to consider any unrealized gains before doing so, but keep in mind that getting the money you need from a taxable account may allow you to avoid income tax on your withdrawal.
That said, you can still take a distribution from your account even if it isn’t required. The RMD waiver isn’t forcing anyone to skip payments if they would rather not. If you don’t have other sufficient resources, you are free to take what you need.
The Bottom Line
All things considered, seniors caught a big break when the CARES Act RMD waiver went into effect. Many retirees complain that forcing them to take RMDs is unfair, even under relatively favorable conditions. Fortunately, the federal government recognized that requiring distributions in 2020 would have amounted to forcing far too many retirees to sell low in the down market, having potentially far-reaching effects.
The idea is to give retirees the breathing room they deserve as their account values hopefully recover soon.
Joseph DiSalvo, ChFC, AIF and Marie L. Madarasz, AIF of Quest Capital & Risk Management, Inc. are committed to bringing their clients the clarity that will promote and enhance confidence in the future. For more than two decades they have used a proven process that helps clients think through how best to structure and manage their resources in order to produce a growing stream of retirement income for life. As experts specializing in all aspects of Retirement Income Planning, they are passionate about the coordination and integration of their clients’ income, investment, and tax planning strategies in order to help clients live the life they’ve worked hard for. Joseph and Marie are strong advocates of financial education, seeking to teach others how to achieve sustained success and lifelong prosperity.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
This material was prepared by Crystal Marketing Solutions, LLC, and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate and is intended merely for edu