By James B. Fleming
On March 27, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) became law. Among the most impactful tax changes found in the $2 trillion stimulus bill are the provisions affecting retirement accounts.
Retirees do not need to take Required Minimum Distributions (RMDs) in 2020. This temporary change allows those who do not rely on their retirement accounts for living expenses to keep more of their money in their retirement account. RMDs are minimum amounts that a retirement plan account owner must withdraw annually starting with the year that they reach 72 (70 ½ if they turn 70 ½ before January 1, 2020). In any other year, skipping an RMD results in a 50% tax penalty on the amount supposed to be withdrawn.
The RMD waiver also applies to 2019 RMDs. Those who turned 70 ½ in 2019 and have not taken their RMD can waive both their 2019 RMD and their 2020 RMD. This is because when account owners first begin taking RMDs, they have the option of either making their first withdrawal in the year they turned 70 ½ or waiting until April 1 of the following year. If they choose to wait until the following year, they must take their first two RMDs in the following year. Now, because of the CARES Act, both RMDs are waived.
If an account owner took their 2019 or 2020 RMD within the last 60 days, they are in luck. Any RMDs already taken can be put back into an IRA by rolling over the RMD into the same or a different IRA account. However, the account owner must rollover within 60 days of withdrawing the RMD and must not have made any other rollovers in the past year.
The account owner can also consider rolling over their traditional IRA into a Roth IRA, using a strategy called a Roth conversion. Now may be the best time in history to do a Roth IRA conversion. Although the account owner won’t avoid the tax on those conversions, they will have the benefit of letting that money grow in a tax-free Roth account. Additionally, now that the 2019 tax return filing date is extended from April 15 to July 15, 2020, the date for making 2019 IRA and Roth IRA contributions are also extended to July 15, 2020. The extended deadline also applies to 2019 Health Savings Account, Archer Medical Savings Account, and Coverdell Education Savings Account (ESA) contributions.
Beneficiaries of inherited IRAs also qualify for the waiver, meaning the beneficiary does not need to withdraw in 2020. However, beneficiaries of inherited IRAs do not qualify for the rollover.
Retirement account owners, regardless of age, can withdraw up to $100,000 from their IRAs in 2020 if they were affected by the coronavirus and not be subject to the 10% excise tax on early distributions. Those who urgently need cash can now get a tax-favored distribution from their retirement account. The account owner can elect to report the withdrawal evenly over 2020, 2021 and 2022 to minimize income tax. Distributions will not be subject to the 10% excise tax otherwise imposed on distributions before age 59 ½. The account owner will not need to pay the tax on the distribution if they repay the distribution to an IRA or other eligible retirement plan within three years of the distribution.
The CARES Act broadly defines a person “affected by coronavirus” as a person:
- who is diagnosed with coronavirus;
- whose spouse or dependent is diagnosed with coronavirus; or
- who experiences adverse financial consequences as a result of:
- being quarantined,
- being furloughed or laid off,
- having reduced hours,
- being unable to work due to lack of childcare,
- closing or reduced hours of a business owned or operated by the participant, or
- any other factor determined by the Secretary of the Treasury.
Every person’s situation is different. It can be difficult to understand how these tax laws affect your estate plan. Strauss Attorneys, PLLC can help you navigate through these laws and ensure your estate plan is most beneficial to you and your loved ones. We will be happy to consult with you about your personal situation.