RMD Waivers Under the CARES Act
May 11, 2020
By: Rebecca A. Miller
The Coronavirus Aid, Relief, and Economic Security (CARES) Act, passed on March 27, 2020, includes a waiver of required minimum distributions (RMD) for 2020. The CARES Act provides that the “minimum distribution rules” shall not apply for 2020. This includes IRAs, Roth IRAs, qualified “defined contribution” plans, 403(b) plans, and government-employer-type 457 plans. It does not include defined benefit plans (i.e. pensions).
What Should I Do?
- Consider not taking your RMD in 2020. RMD amounts are based on the value of the account at the end of the previous year (for 2020, December 31, 2019). Due to significant market losses, RMDs in 2020 may represent a much larger percentage of the depressed fair market value of your retirement account. The CARES Act waiver allows you to leave your 2020 RMD in your retirement account potentially recouping some of the market losses when the economy turns around.
- Compute your 2020 RMD as if the CARES Act waiver didn’t exist (divide the prior year-end balance by the applicable distribution period). This step is important in understanding that the 2020 RMD is not postponed, it is eliminated. This means that the payout period isn’t lengthened, but only that the 2020 RMD is “skipped.” RMDs for 2021 (and after) will be calculated as if the RMD for 2020 had been taken, regardless of whether you take your RMD or not.
- Consider a Rollover. Usually RMDs are not eligible for rollover, however, because RMDs are waived for 2020, distribution of any amounts that would have otherwise been 2020 RMDs may be rolled over. These rollovers are generally required to be completed within 60-days of receipt; and, if the distribution is made from an IRA, it is subject to the once-per-year rollover rule. The 60-day rollover rule has been extended until July 15, 2020, if the rollover was required to be completed on or after April 1, 2020 (helpful only if you took a distribution on or after February 1, 2020). If the distribution came from an IRA and the recipient has done a prior IRA-to-IRA rollover of a distribution less than 12 months prior, they are not eligible to roll over to an IRA (however, these distributions may be rolled over to a qualified plan or a Roth IRA (a taxable Roth conversion)). Also, RMDs from an inherited accounts are not eligible for a rollover unless the recipient of the inherited account is the decedent’s surviving spouse.
Special Rule for Individuals who Turned Age 70 ½ in 2019
An individual who turned 70 ½ in 2019 had the option of either taking their 2019 RMD (their first distribution) in 2019 or postponing the 2019 RMD and taking it by April 1, 2020. If the 2019 RMD was not taken by December 31, 2019, and instead postponed to 2020, the waiver applies to the postponed 2019 RMD as well as the 2020 RMD.
If the 2019 RMD was taken in 2019, the 2020 RMD waiver does not apply to the 2019 RMD, but would apply to the 2020 RMD. You cannot roll over the 2019 RMD nor can you reverse the distribution.
Special Rule for Beneficiaries Taking Under the 5-year Rule
Beneficiary retirement accounts are also subject to RMDs, and the RMD amount for the year is determined by the beneficiary’s life expectancy, the decedent’s remaining life expectancy or the 5-year rule. Under the CARES Act, beneficiaries taking under the 5-year rule get one extra year if the decedent from which the beneficiaries inherited died between 2015-2019. For these beneficiaries, the 5-year rule becomes the 6-year rule. This rule does not apply to beneficiaries of 2020 decedents.
- What if you already took your RMD for 2020? Sam, who is 75 years old and retired, took his 2020 RMD of $50,000 from his employer 401k on March 1, 2020. He can rollover the $50,000 distribution into an IRA eliminating the current income tax on the distribution. If Sam had income tax withheld on his distribution, he will need to replace the withheld income tax with cash in order to rollover the total distribution and wait until the next tax filing season to apply for a refund of the withheld tax.
- What if you already took your RMD in 2020 in monthly installments? Sam, who is 75 years old and retired, took his 2020 RMD in monthly installments, beginning in January of 2020. He can only rollover one of these distributions because of the once-per-12-month rule.
- What if your RMD was a distribution of property? Sam, who is 75 years old and retired, took his 2020 RMD of $70,000 in the form of stock, on February 1, 2020. Currently, the stock is worth only $30,000. Assuming he hasn’t sold the stock, he can roll the stock into a traditional IRA eliminating the current income tax on the distribution. If Sam wants to convert the stock to a Roth IRA he should still roll the stock into a traditional IRA first as the Roth conversation is based on the fair market value of the distribution ($70,000) not the fair market value at the time of the conversion ($30,000). If Sam rolls the stock into a traditional IRA first, he can then move the stock out and into a Roth IRA, only paying tax on $30,000. If Sam sold the stock after he took it out of his IRA, he cannot substitute the proceeds and make a rollover (there is an exception for qualified plans).
If you have questions about RMDs and COVID-19, please contact your Nyemaster Goode attorney.