How RMD rules work
To prevent investors from taking advantage of tax deferrals indefinitely, the IRS requires annual minimum account distributions—RMDs—from retirement accounts, starting at age 70½ or 72 (as applicable). The amount of an RMD is based on an investor's account balance at the end of the prior year, as well as life expectancy. The first RMD is due by April 1 in the year after an investor attains age 70½ (or age 72, as applicable), and subsequent distributions are due by year end; however, a non-5% owner in an employer-sponsored retirement plan may generally further delay his or her first RMD to
April 1 of the year following retirement, if later. Note: An investor’s second RMD is due by December 31 following the April 1 RMD payment (i.e., two RMDs are paid in the same tax year).
The 2020 RMD waiver
Recent market volatility has affected the value of investors’ retirement accounts, causing many to be lower than they were on the valuation date for 2020—December 31, 2019. Recognizing this, lawmakers included a temporary waiver of RMDs in the Coronavirus Aid, Relief, and Economic Security (CARES) Act for some retirement accounts. The CARES Act waives RMDs that would otherwise be paid in 2020 for IRAs and inherited IRAs, as well as for defined contribution (DC) plans, such as employee stock ownership, 401(k), profit-sharing, money purchase, 403(b), and governmental 457(b) plans. This means that, depending on the provisions of the retirement account:
- An investor with an RMD beginning date of April 1, 2020, may be allowed to wait until December 31, 2021—skipping both the first and second RMDs.
- An investor who was required to begin receiving RMDs before 2020 may be able to skip the 2020 RMD.
- An investor with an RMD beginning date of April 1, 2021, may be allowed to wait until December 31, 2021—skipping the first RMD. Due to the increase of the RMD age to 72 under the Setting Every Community Up for Retirement Enhancement (SECURE) Act, this only applies to non-5% owners in DC plans who attained age 70½ before December 31, 2019, but retired in 2020.
Clients who already took an RMD may be able to roll it over or repay it to a retirement savings plan
Some of your clients may have already taken their 2020 RMD. For RMDs paid between February 1 and May 15, 2020, investors may be able to roll them over to a retirement account until July 15, 2020 (i.e., the extended deadline provided by IRS Notice 2020-23). RMDs paid after May 15 may be rolled over within 60 days in accordance with indirect rollover rules. Sixty-day rollovers to IRAs, however, are limited to one per year. It’s possible further guidance may relax this rule and/or provide further extensions.
Investors who are unable to use the rollover option may be able to treat their 2020 RMD as a coronavirus-related distribution under the CARES Act, provided they’re qualified individuals. In this case, they may be able to spread the payment of income taxes over three years and/or repay all or part of the RMD to a retirement account over the same three-year period. Those who believe they’re so affected should speak with their tax advisor to see if they qualify.
The CARES Act RMD waiver increases client options
The COVID-19 pandemic is forcing older clients to deal with the most serious financial and health crises of their lifetime—simultaneously. But thanks to the CARES Act, RMDs are one worry that they may be able to forget about in 2020. Even those who’ve already taken their RMD in 2020 may have options to return it to a retirement account—by a rollover or, in some cases, by repayment, as noted above. The 2020 RMD waiver gives financial professionals more tools to help their clients through this challenging time.
The content of this document is for general information only and is believed to be accurate and reliable as of the posting date, but may be subject to change. It is not intended to provide investment, tax, plan design, or legal advice (unless otherwise indicated). Please consult your own independent advisor as to any investment, tax, or legal statements made herein.
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