What to Know About RMDs in 2020

The CARES Act, recently signed into law, not only unleashed a flood of financial aid to people and businesses, but it also tweaked a host of rules and regulations to make our financial lives a little easier right now. Among many changes, the CARES Act waives Required Minimum Distributions (RMDs) for IRAs and defined contribution plans such as 401(k)s in 2020, and that could have a big impact on how you generate income this year if you’re subject to an RMD.

Here’s what you should know about RMDs in 2020 and what you can do if you already took one.

HOW RMDs WORKED PRIOR TO THE 2020 RULE CHANGE

RMDs dictate the minimum amount of money you must withdraw — and generally pay tax on — from IRAs or 401(k)-type plans in a given year, and after you reach a certain age. Recent tax law changes increased the age at which RMDs kick in to 72 (if you reached the age of 70½ in 2019 or earlier, the prior rule applies). If you don’t take the withdrawals, you’ll typically get nailed with a stiff penalty that’s equal to 50 percent of the amount you should have taken out.

RMDs were created because policies creating tax-advantaged savings vehicles were aimed at encouraging saving for your own retirement, deferring taxes associated with income now for later.  Essentially, the country is willing to delay income tax revenue to benefit your self-funded retirement nest egg. However, those tax advantages are balanced by the requirement that you use those funds in retirement, at which time you’ll pay income taxes.

WHY WERE RMDS WAIVED?

Waiving RMDs this year allows people to avoid selling investments in retirement accounts at depressed prices, which depletes savings faster. For individual accounts generally, the 2020 RMD amount would be computed using the market values of those investments on Dec. 31, 2019 — basically take the same sized pie piece, but from a smaller pie. Waiving the RMD for 2020 buys time for the value of your investments to recover and also reduces the outsize impact this year’s RMD would have otherwise had on your retirement savings. 

The RMD waiver is particularly beneficial for people who can utilize other sources of retirement income, such as a cash reserve, cash value life insurance, nonqualified annuities, pensions and more. Now, you could avoid selling any investments in your retirement account this year and instead draw income from other sources.

WHAT IF YOU ALREADY TOOK YOUR RMD IN 2020?

You can’t exactly take it back, but you could roll the distribution into an IRA or other eligible rollover account. Ordinarily RMDs cannot be rolled over. However, since RMDs are waived in 2020, the distribution you took wasn’t an RMD, it was a normal distribution. 

A normal distribution can be rolled into an IRA within a 60-day window. The IRS recently extended the deadline for certain distributions to be rolled over until July 15, 2020, provided that the distribution is otherwise eligible to be rolled over and the 60-day deadline would have occurred after March 31, 2020 and before July 15, 2020.

However, you aren’t home free yet. Rollovers are subject the so-called “once-per-12-months” rule, and it still applies. It dictates that a person can only make one rollover from an IRA to another in any 12-month period, regardless of the number of IRAs owned. There are exceptions to this rule, such as a trustee-to-trustee transfer. Instead of diving into the one-per-12-month rule’s many nuances, at this point it might be a good idea to work with a tax professional or advisor — especially because the IRS may issue new guidance in the weeks ahead. 

If you qualify for “coronavirus-related” relief, then you have three years from the day after the date of the distribution to roll the distribution into an IRA or other eligible rollover account.

Ultimately, if you did take an RMD already in 2020, know that there may be some ways to “reverse” it.

WHAT IF YOU INHERITED AN IRA?

This one is a little more straightforward. Inherited IRA distributions made to a non-spouse beneficiary are not eligible for a rollover. Therefore, distributions that have already been taken from an account like this can’t be recontributed or rolled to a new IRA. 

These rules were complex enough before the recent changes. Consulting a tax professional or advisor can help you navigate these special rules for 2020.