CARES ACT May Provide Tax Relief for Taxpayers Subject to Required Minimum Distribution Rules

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When Congress passed the Coronavirus Aid, Relief, and Economic Security (CARES) Act in March of this year, most people focused on the stimulus payment. However, if you have retirement savings, there may be additional helpful provisions in the Act.

If you receive an annual Required Minimum Distribution (RMD) from a tax-deferred retirement account like an IRA or 401k and don’t need the income this year, Congress has granted a one-time exception to the required minimum distribution. Not receiving your RMD may lower your taxable income, and you don’t have to take out more next year to make it up. Simply put: if you don’t need the additional income and the taxes an RMD provides, you don’t have to take it.

There’s more to this rule than can be covered in a short blog post, so speak with your financial planner or plan administrator right away.

If you haven’t yet taken any RMD for 2020: If you take your RMD at the end of the calendar year, and you want to skip 2020, you’re fine. Confirm your intention not to take the RMD with your financial planner or plan administrator.

If you’ve already taken some or all of your RMD for 2020: If you take RMDs monthly, or take your RMD as a lump sum early in the year, you may still be able to take advantage of this one-time exclusion. If you took RMD prior to the CARES Acts passage and want to reverse course, you have three possible options:

Repayment of IRA RMD

If you received RMD, you can make the decision to “repay” the distribution—but you have to act fast! The CARES Act allows you to return the funds by August 31, 2020, to avoid being taxed on this year’s RMD.   You’ll need to talk to your financial planner or plan administrator right away. This applies only to distributions from IRAs.

Rollover or Conversion to Roth IRA

RMDs cannot usually be “rolled over” into another retirement account. In a typical RMD year, your IRA cannot undergo a Roth Conversion until after you’ve taken your RMD.  However, because no RMD is required in 2020, you rollover RMD to another retirement account or take a pre RMD Roth Conversion (there are other tax consequences to consider, but this is a new option.) The upshot of the CARES Act is that if you took an RMD in early 2020, only to find out it wasn’t really “required” this year, it is eligible for a rollover within 60 days of the date of receipt. It’s not all good news on this front, as the new law allows you to rollover or convert only within 60 days, and only one time in a 12-month period. That means if you took monthly distributions, only one can be rolled over, and it must have been received in the last 2 months.

Rollover or Conversion to Roth IRA for Withdrawal taken for a “Coronavirus Related Distribution.”

If you took an RMD this year and it qualifies as a “coronavirus related distribution” you have up to three years to roll it over.

You’ll get to ignore the normal 60 days and “one in 12 months” rules that usually apply to rollovers. A Coronavirus related distribution is one taken during 2020 and used:

  • By an individual diagnosed with Covid-19, or
  • By the spouse of an individual diagnosed with Covid-19, or
  • By an individual who suffers adverse financial consequences from Covid-19 because they are quarantined, furloughed, laid off, or suffer a reduction in work hours, or cannot work or work reduced hours due to a lack of childcare caused by Covid-19.

You May be Able to Pull Money from an Account Early, Without Penalty: In most years, a withdrawal from your IRA that comes prior to age 59 ½ comes with a penalty. However, in 2020, an account owner may be able to request a “coronavirus-related distribution” (“CRD”) from their retirement plans prior to age 59 ½.

A taxpayer may be eligible for CRD if they have seen their employment terminated, or suffered coronavirus related “hardship.” A CRD can be made without (1) incurring the 10% “extra tax” on early distributions; (2) having the funds taxed ratably over a period of three years; or (3) increasing your income tax obligation, as these CRDs permit withdrawals to be rolled back into your retirement plan within the three years.  CRDs will not use up your once-per-12- month limit on IRA-to-IRA rollovers.  There are specific requirements that must be met to qualify for a CRD and not all retirement plans are eligible.  Please speak with your plan administrator to determine if this is a good fit for you.

If you have estate planning document needs, please contact us at (503) 245-0894 to schedule an appointment with one of our attorneys today. This post was written by Brett Callahan, J.D.

The Law Offices of Nay & Friedenberg gratefully acknowledges Natalie Choate and her recent presentation “Planning for Retirement Benefits: Recent Developments” which provided much of the information in this post.