At the end of 2019, many investors’ retirement accounts were at an all-time high, unemployment was at an all-time low, and Congress just passed legislation to encourage businesses to sponsor retirement plans and workers to save for retirement. That legislation, the Setting Every Community Up for Retirement Enhancement Act of 2019 (the SECURE Act), increased the starting age for required minimum distributions (RMDs), effective in 2020. Then, just three months later, a global pandemic has caused markets to drop, many businesses to temporarily close, and unemployment to soar to record high levels. In response, Congress passed a trio of legislative relief packages. Provisions affecting retirement plans are included in the Coronavirus Aid, Relief and Economic Security Act (the CARES Act). In addition to providing funds directly to businesses and individuals, the CARES Act waives RMDs in 2020.
With the RMD rules changed by the SECURE Act and CARES Act, in rapid succession, with immediate effective dates, it can be confusing as to who must take an RMD and when. This blog reviews the RMD changes effective in 2020.
Before the SECURE Act, IRA owners had to begin taking RMDs from their traditional, SEP and SIMPLE IRAs for the year they attained age 70½. The deadline for taking the first distribution was April 1 of the year following the year they turned 70½. Each year after the 70½ year, an RMD must be taken by December 31. This means two RMDs were required in the IRA owner’s second RMD year if the first RMD was delayed until April 1.
The SECURE Act increased the starting age for RMDs to 72. The deadline for taking the first distribution is April 1 of the year following the year the IRA owner turns 72. (All other RMD rules remain the same.) This change is effective beginning in 2020 for those who had not reached age 70½ by December 31, 2019. Those who had reached age 70½ or older by December 31, 2019, must follow the prior rules and start RMDs at age 70½.
Under the SECURE Act, IRA owners who would have an RMD due in 2020 (if not for the CARES Act) included those who
• Turned 70½ or older in 2018 because they already started RMDs before 2020 and must continue taking RMDs annually
• Turned 70½ in 2019 and did not take their first RMD in 2019 because they could delay the distribution until April 1, 2020 (these IRA owners also had a 2020 RMD due by December 31, 2020)
The SECURE Act also changed the beneficiary payment options to eliminate the five-year rule and the life expectancy payment option for most non-spouse beneficiaries, effective for deaths occurring on or after January 1, 2020. Under the new rules, the only payment option for these beneficiaries is to deplete the IRA by the end of the 10th year following the year of death. “Eligible designated beneficiaries” and beneficiaries who inherited IRAs in 2019 or earlier may take beneficiary distributions under the rules in effect before the SECURE Act. (See our blog SECURE ACT SERIES: Big Changes for Beneficiaries May Affect Your Financial or Estate Plan for more information.)
The coronavirus pandemic has caused an economic as well as a healthcare crisis. The stock market has dropped significantly since the end of 2019. Because RMDs are calculated based on the prior year-end balance, RMDs calculated for 2020 would require a disproportionately large portion of the now lower account balances to be distributed, which would prematurely deplete the account and lock in investment losses. The CARES Act waives RMDs in calendar year 2020 so that IRA owners and beneficiaries are not forced to take distributions from their IRAs, which may give them time to recoup some of the investment losses before RMDs resume in 2021. The 2020 RMD waiver applies to those who:
• Delayed their 2019 RMD until April 1, 2020 – that RMD is not required to be taken
• Have an RMD due by December 31, 2020 – that RMD is not required to be taken
• Use the five-year rule to deplete an Inherited IRA – 2020 is not counted in the five years, essentially providing 6 years to deplete the account (The CARES Act did not address beneficiary distributions under the 10-year rule created by the SECURE Act; future IRS guidance may address this issue.)
If an IRA owner already took an RMD in 2020, they may roll it back into an IRA within 60 days of receiving the distribution. (Future IRS guidance on the RMD waiver could possibly extend the 60-day deadline.)
Anyone who needs to withdraw money from their IRA may do so. Nothing in the CARES Act prohibits distributions. In fact, the CARES Act provides tax relief for certain distributions taken in 2020.
If an IRA owner qualifies to take a coronavirus-related distribution as defined under the CARES Act, the IRA owner may take up to $100,000 from the IRA in 2020 – free from the 10% early distribution tax for those under age 59½. IRA owners may include the distribution amount in their taxable income over three years to spread out the tax liability. IRA owners may also repay the distribution amount to the IRA within three years of the distribution and reclaim any tax paid on the distribution.
To qualify for this tax relief under the CARES Act, an individual must have
• Tested positive for COVID-19
• Had a spouse or a dependent test positive for COVID-19
• Experienced adverse financial consequences as a result of being quarantined, furloughed, laid off, or unable to work due to lack of childcare or reduced work hours as a result of COVID-19
• Closed or reduced the hours of a business due to COVID-19
The RMD waiver and the coronavirus-related distribution relief for 2020 also apply to 401(k) plans, 403(b) plans and governmental 457(b) plans.