The legislation passed in December of 2019 made significant changes to tax treatment and rules on distribution of retirement plans (the Secure Act).  Then came the CARES Act which, because of the COVID crisis, gave Americans relief from a number of the usual distribution rules.  Here are some critical changes.  Here are 5 important questions you should know the answers to about these plans and if they apply to you:

Q1.         Have you taken a required minimum distribution (RMD) from a qualified plan (401(k), 403(b) or IRA in 2020? 

A1.  If the answer is no, but you are expecting to do so before the end of the year, the CARES Act, Section 2203, suspends those for the year 2020.  So, if you haven’t, and many people wait until near the end of the year to do so, then you don’t have to.  Consult with your financial planner or CPA to see if this is something you want to take advantage of. Some plans, like defined benefit plans or Section 457 plans, do not have their RMDs suspended for 2020, so it is important to know just what kind of plan you have.

Q2. Was your beginning date for RMDs 2019? 

A2.   If your first distribution date was in 2019 and you took your RMD in that year, then you can’t put it back.  But if you deferred until April 1, 2020, the suspension rules apply, and (bonus!) you can have TWO years of your RMDs waived.  Sounds crazy, but if you fall into this loophole, you get a bonus year of deferral.  You can defer both your 2019 and your 2020 RMDs. But this doesn’t apply to inherited plans or those individuals born after June 30, 1949 or persons who missed RMDs from prior years.

Q3.         If you have already taken all or a part of your RMD from an IRA for 2020, would you have preferred not to? 

A3.     If so, the passage of the CARES Act may give you a path to put it back.  If you took all or a part of your RMD in 2020,  you have until August 31st to repay and  put it back into the account.  This does not apply to your 401k, only an IRA. There are some restrictions, and the rules are complicated, but if you took an RMD and wish you hadn’t, there may be hope.

Q4.   Instead of repaying the RMD, would you prefer to roll it over into a traditional or ROTH IRA? 

A4.   Usually, your only option would be to repay your RMD within 60 days, but now that date has been extended until August 31st 2020 no matter when you took it.  But note there are exceptions. The rules depend on whether the beneficiary is a spouse or non-spouse, on the type of plan and your plan may still be  subject to the “once per 12 month” rule (which doesn’t apply to ROTHs).  And there are hardship waivers. This gets confusing.  But since there really is no such thing as an RMD for 2020, many planners think this opens up an opportunity for clients to do some additional converting to ROTH accounts.  This may be especially important for retirement accounts you don’t really anticipate needing, especially if you have large qualified accounts and only one or two children.  And THAT is because of the huge change from the SECURE Act: leaving qualified accounts to your child or children means that they’ll have to take that money out of those accounts and pay taxes on them within ten years of the year of your death.  This means your child or children may be taking these distributions from your retirement assets in their peak earnings years, when their tax rates may be substantially higher than your current rate.

Q5.  If you took an RMD in 2020, did you have a family member diagnosed with coronavirus?

A5.  If so, you might be allowed to classify the distribution as a “coronavirus-related distribution.  If the distribution can be so classified, a “qualified individual” may roll the distribution over for up to three years rather than the usual 60 day or August 31, 2020 deadlines.

August 31 is an important deadline to take advantage of several of the opportunities to borrow and repay retirement assets.  Other planning considerations may have changed as well, so if you want to consider taking advantage of some of these opportunities, please consult with your financial planner, CPA or a member of our firm to learn if you qualify.


By: Michael Carroll