While the CARES Act relief efforts were largely targeted towards businesses, there were also significant changes around rules for individual retirement plans. Individuals can now benefit from suspended required minimum distributions (RMDs) and are offered relief options if they have been impacted by COVID-19.
RMDs Waived for 2020
The biggest retirement plan change brought by the CARES Act is the suspension of RMDs for 2020. This applies to most RMDs, including those for traditional IRAs, 401(k) and 403(b) plans of those reaching age 72, or age 70 ½ for years before 2020, and inherited IRAs.
Which RMD distributions are waived?
The waiver applies to distributions for 2020 and to first-time distributions for 2019 that could have been delayed to April 1, 2020 and not paid in 2019. The waiver will not change a participant’s required beginning date for minimum distribution rules in future years.
What are the tax benefits?
The waiver of the RMD creates several tax planning opportunities. If you are going to be in a lower tax bracket than normal from other income, it may be beneficial to take enough of a distribution to take advantage of the lower brackets.
Using a Qualified Charitable Distribution can also be a beneficial use of the distribution and a reason to continue to take the distribution in 2020. Up to $100,000 can be donated directly from an IRA to a qualifying charity each year. However, special charity rules for 2020 could allow a much greater distribution from an IRA to be deducted.
On the other hand, a smaller distribution could help bring your taxable income to the lowest possible tax bracket. Income from long-term capital gains and qualified dividends can be taxed at 0% if taxable income is in the lowest two tax brackets. Depending on your situation, you may prefer to skip or reduce your RMD.
What if I already took my RMD?
If you already took your RMD and are now reconsidering, you may be able to roll the distribution back to your retirement account. Notice 2020-51 provides for an extension of the normal 60-day rollover window to August 31, 2020.
Be sure to take note of your withholdings for the year if you choose to skip or reduce your RMD. Since taxes are often withheld from RMDs, you may need to adjust other withholdings or estimate payments to help avoid any penalties.
Rules for Coronavirus-Related Distributions
In addition to the elimination of the RMD requirements, there are special rules for qualified individuals who are diagnosed with COVID-19, whose spouse or dependent is diagnosed with COVID-19, or who have experienced adverse financial circumstances due to COVID-19, such as a reduction in hours, layoff, furlough, or losing child care.
How are coronavirus-related distributions treated?
Distributions taken in 2020 by qualifying individuals are considered coronavirus-related distributions, up to $100,000. Qualifying distributions are not subject to a 10% early withdrawal penalty nor subject to a 20% withholding.
If a qualifying individual made a coronavirus-related distribution in 2020, the income can be treated as being received equally over a three-year period for tax purposes starting with the year in which you receive your distribution. For example, if you receive a $30,000 COVID-19-related distribution in 2020, you could report $10,000 in income on your federal income tax return for each of 2020, 2021, and 2022. However, you have the option of including the entire distribution in your income for the year of the distribution.
How can coronavirus-related distributions be paid back?
A COVID-19 related distribution can be repaid in full or partially with contributions for up to three years from the date of distribution. If the repayment is made after the initial year, amended tax returns can be filed to adjust for the taxable income reported before the repayment. While a COVID-19 related distribution has the three-year payback, those who have taken RMDs in 2020 have until August 31, 2020 to put the money back in to avoid the tax consequences.
What about my employer’s maximum plan loan amount?
In addition to options for distributions, the CARES Act allows employers to increase the maximum loan amount available to qualified individuals. For plan loans made to a qualified individual from March 27, 2020 to September 22, 2020, the limit may be increased up to the lesser of $100,000, or the individual’s vested account value. Qualified individuals may also defer for one year any loan payments coming due through December 31, 2020.
If you have questions, Anders is here to help. Contact an Anders advisor below to learn more about the IRA changes surrounding the CARES Act. Visit our COVID-19 Resource Center for more news, tools and insights you need to know in these uncertain times.
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