To Do or Not to Do – RMD Rules for 2020
The Coronavirus Aid, Relief, and Economic Security (CARES) Act was signed into law on March 27th, 2020. It was designed to sustain and stimulate the economy. One temporary new rule suspended Required Minimum Distributions (RMDs) for retirement plans.
Normally, clients must withdraw a specifically calculated amount from their IRAs, inherited IRAs, and other employer-sponsored plans such as 401(k)s, when they are age 72 or older. The provisional suspension applies to all RMDs due in 2020.
There are some important decisions for alternative actions clients should make as they approach this one-year RMD rule exception.
A Case for Skipping Your RMD
One argument for skipping the RMD this year is that most account values plunged early in the year, and it is best not to take withdrawals when the market is down. We’re supposed to buy low and sell high, right?
What's more, the exact amount of your RMD is partly based on your account value at the close of 2019, when the markets were riding high. You would have been forced to take a pretty big chunk out this year. Maybe it’s best to let things try and recover.
The obvious reason to skip your RMD in 2020 is to lower your income and tax implications. If you have other sources of income, and want to keep your taxes low this year, maybe you defer the income. The least amount of taxes you pay, the more money you keep.
A Case for Taking Your RMD
If your lifestyle expenses are dependent on the RMD, take the distribution. End of story. This one year only, you can be flexible on the withdrawal. It can range from zero, to 100% of your account, or anything in between. You can consider taking a smaller percentage if your needs permit it.
We try to assess individual needs of every client. Deciding to withdraw money from your retirement account could be motivated by understanding your marginal tax bracket this year compared to future years. Sometimes it is best to take some money from your IRA, especially if you are in a lower tax bracket.
If we have not yet reviewed your personal alternatives this year, we will. Remember, just because you take money from your IRA, does NOT mean you have to spend it. We can transfer money into your Roth IRA or even reinvest it in your non-IRA accounts. These are always good ideas.
What If Your RMD Has Already Been Taken?
If you already took your RMD, you have 60 days to roll the funds back. The IRS has extended the 60-day rollover deadline to July 15, 2020 for distributions, including RMDs, where the 60-day rollover deadline would have fallen between April 1 - July 15, 2020. That is good news for some, but not all. Anyone who is outside the 60-day rollover window can get an extension “if they can show they were negatively impacted by the COVID-19 virus."
For those who took their RMD out of their investment portfolio, they may reinvest that money back into their IRAs. This means you can buy back investments in your portfolio at a potentially less expensive cost.
Do not forget, if you skip this year's RMD, you must be careful not to overlook next year's requirements. We will help remind you at that time.
Tax experts also warn that returning an RMD can only happen once in a 365-day period. Make sure to review the exact rules for reinvesting the money.
The rules are a little different for beneficiaries who inherited tax-deferred accounts. They are eligible to skip this year's RMD, but they cannot return the funds if they have already taken them — with the possible exception of spouses, who can execute a Spousal Beneficiary Rollover. In general, some beneficiaries cannot enjoy the same opportunity to replace already distributed amounts.
We are here to help you. Please do not hesitate to give us a call to discuss your RMD strategic planning for 2020.