We didn’t have to wait long for the answer to the question posed in the title of my March 16th blog, Will Congress Suspend 2020 Required Minimum Distributions?
On March 27th, President Trump signed the $2.2 trillion, 880-page Coronavirus Aid, Relief, and Economic Security (CARES) Act. Buried in the act is a four-page provision that waives required minimum distributions, or RMDs, for 2020.
The waiver applies to traditional IRAs and workplace retirement plans including 401(k), 403(b), and 457(b) plans. 2020 RMDs are also waived for inherited traditional and Roth IRAs.
What If You Have Already Taken Your 2020 RMD?
As pointed out in my March 16th blog, there’s precedent for waiving RMDs. This was last done in response to the economic downturn in 2008 with the enactment of the Worker, Retiree, and Employer Recovery Act. The Act was signed on December 23, 2008 and was effective for 2009.
One of the issues discussed in my blog post was that any 2020 RMD suspension would need to be retroactive. Retroactive suspension of RMDs would give individuals who have already taken their 2020 RMD the opportunity to return the full amount to the retirement plan account from which it was withdrawn.
The CARES Act waives 2020 RMDs retroactively, however, there’s a catch. You must apply the “60-day rollover rule” to determine if you can return your RMD to your Traditional IRA or other retirement plan account. Under this rule, you have 60 days from the date you received your distribution to return it back to the account from which it came. You can do this provided you haven’t done any other rollovers within the previous 365 days.
As an example, assuming that you withdrew your 2020 RMD of $20,000 from your IRA on February 10th and you did no other IRA rollovers in the previous 365 days, you have until April 10th to return the funds to your IRA.
Let’s assume that you had federal and state income tax of $4,000 and $1,000, respectively, withheld from your RMD. What happens if you return $15,000 to your IRA account by the deadline? You will be taxed on your original distribution of $20,000 less the amount returned of $15,000, or $5,000. You can also claim your RMD income tax withholding totaling $5,000 on your 2020 income tax returns.
Not all RMDs are eligible for the 60-day rollover rule. Non-spouse beneficiary owners of inherited IRAs cannot do a 60-day rollover. Once the money is withdrawn from an inherited IRA, it cannot be returned.
Any time that legislation is enacted that affects retirement plans, you should use this as an opportunity to revisit your retirement income plan to determine how you can use it to optimize your plan. The CARES Act waiver of RMDs for 2020 is no exception.
You should begin with the question that you should be asking yourself every year regardless of your RMD: How much should you withdraw from your retirement plan accounts? The answer to this question, as always, depends on a number of factors that need to be considered and analyzed holistically for the current and future years. These include current and projected expenses, income sources, investment assets, taxation, and extended care plan.
As pointed out in my March 30th blog post, The Roth IRA Conversion Trifecta, there’s an unprecedented opportunity to do a sizable Roth IRA conversion this year. Assuming that you haven’t taken your 2020 RMD yet or have done so and aren’t beyond the 60-day deadline for returning it to your traditional IRA or other retirement plan account, you may want to use this amount as the starting point for doing a Roth IRA conversion this year.
Using the previous example, assuming that your 2020 RMD is $20,000, you haven’t taken it yet or are within the 60-day window for returning it, and you have other sources of income to meet your needs, why not consider a Roth IRA conversion of $20,000? Furthermore, given the three events discussed in my March 30th post, it could make sense to do a much larger conversion this year subject to availability of cash to pay the income tax liability attributable to the conversion.
Benefits of 2020 RMD Waiver
Looking back to 2009 which was the last time that RMDs were waived, the long-term benefit of one-year relief from RMDs is questionable. This is due to the fact that many retirees still needed to take distributions from their retirement plans since they didn’t have alternative income sources to meet their financial needs. This is certainly the case for many, if not the majority, of retirees today.
There’s no doubt that the 2009 RMD waiver provided psychological relief for many retirees, especially those who had recently retired and were forced to return to the workplace. Unlike 2009 when many retirees were able to find work, this won’t be the case this time around as evidenced by the 10 million unemployment claims filed in the last two weeks with coronavirus job losses projected to total 47 million.
On the positive side, individuals who don’t rely on RMDs to meet their financial needs can retain tax-deferred funds and avoid 2020 taxation on distributions they would otherwise take. Many can use the 2020 RMD waiver as a planning opportunity to optimize their retirement income plan.