Required Minimum Distribution (RMD) Suspended for 2020

by Michelle Maton, CFP®, EA, CeFT™

As a part of the Coronavirus Air, Relief and Economic Security Act (CARES Act) RMD’s were waived for 2020.

Required Minimum Distributions Suspended during the COVID-19

The Required Minimum Distribution suspension includes IRA’s, employer retirement plans, plus 403(b) and 457(b) plans. Those reaching age 70 ½ in 2019 can suspend 2019 RMD, as well as 2020.

Stretch (or inherited) IRA’s will also be able to suspend RMD’s in 2020. Anyone receiving distributions from an IRA under the 5-year rule can ignore 2020 as a year. This waiver does not apply to defined-benefit plans.

The passage of the CARES Act occurred after many IRA account holders had already taken distributions. But the IRS has come to the rescue. The 60-day rollover period for any RMD already taken this year has been extended to August 31, 2020. This gives taxpayers additional time to take advantage of the opportunity to save the taxes generated by the IRA distribution.

For example, “Sally” is in the habit of withdrawing her RMD in January of each year, depositing the lump sum into her money market account and using that money throughout the year to pay for extraordinary bills or expenses. She now has the opportunity to replace that RMD distribution and avoid the taxes. Of course, she must have the money available from other sources if she has already spent some of those funds.

Let us consider “Allen.” Allen choose to take his RMD in monthly distribution; basically, replacing his paycheck. He has already taken six months of RMD distributions to pay his monthly bills. To take advantage of this opportunity, he must return the six months of distributions, which is a rather large amount. To generate enough money, he would be forced to liquidate some of his investment holdings, perhaps causing a taxable capital gain. His decision is a bit more involved as he must weigh the tax savings of returning the RMD against the capital gain tax. In addition, he must determine the source of the funds to replace the forgone distributions for the remainder of the year. In his circumstances, it may be better to maintain the RMD distributions.

“Betty” presents another set of circumstances. She suspended her monthly RMD distributions but chose not to repay the RMD’s already taken but instead to stop the future distributions, thus saving some taxes on the RMD distributions but not liquidating assets to replace those already taken.

Everyone has different circumstance and requirements. If you have not already talked to your planner, now is the time. Contact your TPC planner to find out more.


Michelle Maton, CFP®, EA, CeFT™ is a Partner and Senior Financial Planner in the Chicago office of The Planning Center, a fee-only financial planning and wealth management firm.  Please email her at: michelle@theplanningcenter.com.

 

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