CARES Act Part V: Tax Consequences & Your Minimum Required Distributions

Are you currently taking Required Minimum Distributions (RMDs) from your retirement savings accounts? If so, I encourage you to review the changes that have occurred due to the recently passed Coronavirus Aid, Relief, and Economic Security (CARES) Act.

The impact of the CARES Act on your RMD rules for 2020 depends on a few key factors, such as the type of retirement account you have (one you created vs one you inherited as a non-spouse beneficiary), and whether or not you’ve already taken your RMD for 2020. For guidance on how this change impacts you, find the section heading below that applies to your situation.

Retirement account owner (including a spouse and non-spouse beneficiary) who has not yet taken their 2020 RMD

  • You are not required to take an RMD for the 2020 calendar year
  • Your next RMD is due in 2021, and will be for that year only (the 2020 RMD isn’t just delayed—it’s cancelled)

Original retirement account owner or spousal beneficiary who has already taken their 2020 RMD

  • You have a 60-day grace period to return the RMD to a qualified (pre-tax) retirement account to avoid including the distribution in your 2020 taxable income
  • If you took a withdrawal from a 401k or other company sponsored plan and are having trouble getting the RMD back into the account, consider rolling it over to a traditional IRA

Non-spouse beneficiary of an inherited account who has already taken their 2020 RMD

  • There is no option for you to return the RMD to the existing account or any other pre-tax account. The RMD will be taxable for 2020.

Non-designated beneficiaries (e.g. charities, estates, non-see-through Trusts)

2020 is ignored for purposes of the 5-Year Rule, thanks to the CARES Act. Non-designated beneficiaries who inherited a retirement account between 2015-2019 effectively get a 6-Year Rule due to the exclusion of 2020. This does not impact the new 10-Year Rule imposed by the SECURE Act.

Keep in mind that the changes noted above do not prohibit you from taking distributions from your retirement accounts in 2020, they simply give you the option to skip your 2020 distribution and the accompanied tax if you don’t need the money this year.

Does this RMD waiver present any tax opportunities for 2020?

After reviewing your financial plan, consider whether a Roth conversion would make sense for your situation. Normally, you cannot roll your RMD directly over to a Roth IRA, but since there are no RMDs for 2020 you can choose to take an amount similar to your annual RMD, pay the tax on it, and roll the remainder over to a Roth IRA where it will grow tax free. This is especially attractive from a lifetime tax reduction perspective if you can sell or transfer stocks or mutual funds in the IRA that have experienced a significant drop in value since the beginning of the year. By making these transfers while the market is down, you effectively pay income tax on depressed holdings prior to moving them into a Roth IRA where all future growth in value (when the market rebounds) will be tax free.

Please contact your financial advisor if you have questions about these rules or if you need assistance in returning an RMD to your account within the 60-day window or making a Roth conversion during 2020.

Paul Hansen, CFP®, CPA