CARES Act Drastically Changes Required Minimum Distribution Rules For 2020
The CARES Act essentially suspended required minimum distributions (RMDs) for 2020 across the board. However, there have been a lot of questions about what this means for those who already took out distributions, and the impact on taxes and inherited accounts.
It is important to remember that the CARES Act is a relief bill, and by suspending 2020 RMDs, the government is giving up short-term tax revenue to provide relief to retirees. Additionally, markets have been very volatile, and suspending RMDs gives many Americans the ability to leave their investment portfolios alone to recover over the next year.
What is the 2020 RMD relief?
The bill stated that defined contribution plans, like 401(k)s, 403(b)s, 457(b) plans, and IRAs, may suspend RMDs in 2020. RMDs for 2020 were already a bit lower since 2020 is the first year in which the required beginning date switched from age 70.5 to age 72 – unless someone turned age 70.5 in 2019, in which case they owe an RMD by April 1, 2020. However, the new CARES Act allows account owners to skip both their 2019 RMD if it was their first year and had not yet made an RMD by April 1, 2020, and their 2020 RMD.
Why does skipping RMDs in 2020 matter? For most people, their IRAs and 401(k)s are funded with tax-deferred dollars. Once the SECURE Act passed in 2019, account owners had to start taking out mandatory, taxable distributions from their retirement accounts at age 72.
With many Americans struggling in 2020 because of the pandemic, having more flexibility on distributions can be beneficial. And since the markets have been extremely volatile, giving retirement portfolios another year to recover can be helpful.
The bill also deals directly with specific types of inherited accounts, such as those going to an estate, charity, or certain type of trust at death. These types of beneficiaries – non-designated beneficiaries who inherit a retirement account from a decedent who died before their required beginning date – typically have to distribute the account within five years of the death of the owner. The CARES Act states that if one of the five years is 2020, beneficiaries get an extra year, turning a five-year rule into a six-year rule. This group usually gets less favorable RMD rules than other beneficiaries, so we can expect that inherited RMDs across the board are pushed off for 2020.
Does the new 10-year rule from SECURE Act get impacted?
For those who were aware of the SECURE Act, the largest change it made with regards to RMDs was replace the lifetime stretch provisions for many beneficiaries of inherited IRAs and 401(k)s with a 10-year distribution rule. The CARES Act does not directly impact these accounts.
Instead of lifetime distributions for many beneficiaries starting in 2020, there are no RMDs or 10-year distribution rules in effect, yet. The 10-year period starts in the year after the year of death of the retirement account owner. So, if someone died January 1, 2020, and wanted to leave their IRA to their adult kid, the 10-year rule would start in 2021. The beneficiary has until the end of the 10th year to withdraw the entire account. If the original owner’s account was subject to RMDs, one would be taken the year of death as if the owner was still alive. But, because of the CARES Act the beneficiary would not have to take an RMD in 2020.
The CARES Act was designed to provide relief to Americans who are struggling due to the economic, emotional and physical toll the coronavirus is causing. The goal of suspending RMDs is to give people more control over their funds and to reduce having to sell investments and create a taxable event during a time of emergency.
This will allow many retired Americans to ride out the storm with their retirement accounts for the next year. It is important to remember this is just one set of provisions in an otherwise gigantic relief package totaling over $2 trillion. It is not expected that the RMD relief alone will put people in a secure place, but is a step toward providing widespread relief.