Required Minimum Distributions (RMDs) and Coronavirus-Related Distributions in 2020

Required Minimum Distributions (RMDs) and Coronavirus-Related Distributions in 2020

CARES Act Provides Options To Retirees

As you may know, Required Minimum Distributions (RMDs) are required by tax law to be taken out of your IRA balances each year when you reach the age 72 (70.5 if you were born before July 1, 1949); however, due to the Coronavirus pandemic, you may consider changing your RMD plan in 2020.

On March 27th, 2020, the Coronavirus Aid, Relief, and Economic Security (CARES) Act was passed by Congress to provide over economic relief to American taxpayers, including retirement age individuals.  Detailed in an IRS Publication on the CARES Act, the CARES Act waives required minimum distributions during 2020 for IRS and Retirement plans, including beneficiaries with inherited accounts.

If you already took a 2020 RMD and wish to return it to your account, you have passed the August 31st, 2020 deadline to return the distribution to the original plan.  That said, if you took a distribution from the account for a Coronavirus-related distribution, you may:

  1. Spread the income tax liability across the following 3 years, including 2020, as you see fit (i.e. take 33.33% of income in 2020, 2021, 2022 OR you could claim all the income in 2022, or a combination as your tax plan makes most advantages); and/or,
  2. You may return all or a portion of the coronavirus-related distribution to the plan within that 3 year period IF your plan accepts rollover contributions (most do, but not all!).

If you are a qualified individual, you may designate any eligible distribution as a Coronavirus-related distribution as long as the total amount of distributions does not exceed $100,000.  All Coronavirus-related distributions must be made between January 1, 2020 and December 30, 2020.  You will report this distribution as coronavirus-related on your individual federal income tax return for 2020 using Form 8915-E, which is expected to be made available by the IRS by the end of 2020.

So, should I take a distribution or not?

Although IRA distributions are considered taxable income, taking RMD’s and Coronavirus-related distributions out of your account may not necessarily be a bad thing given your circumstances.

We are in historically low tax rates and it has been suggested that tax rates may be on the rise in the near future to pay for the high cost of this pandemic stimulus and other government entitlements.  If you have no taxable income, you may consider taking distributions at the cost of today’s income tax rates.

Also, if you don’t have the need for additional withdrawals, you may want to consider converting a portion of your IRA balance to a Roth IRA, which will eliminate RMDs on that amount and continue tax-deferred growth.

Last, your social security benefits become taxable once your combined income (Adjusted Gross Income + Nontaxable Interest + ½ of your Social Security Benefit) exceeds $25,000 as an individual or $32,000 as a joint filer.  If you have less combined income than these figures, you may consider taking the additional amount out of your IRA balances, paying today’s low tax rates, while not creating additional tax on your social security benefits.

You should always consult your tax advisor before making any decision on your particular account.  There are many things to consider when strategically taking distributions from retirement accounts and/or making Roth IRA Conversions.  If you believe any of these strategies may make sense for you, speak to your Symphonic Financial Advisor today.

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