At the end of last year (2019), Congress passed the Setting Every Community Up for Retirement Enhancement Act of 2019 (the SECURE Act) to encourage businesses to sponsor retirement plans and workers to save for retirement, which increased the starting age for taking required minimum distributions (RMDs) effective this year. Shortly after, the global pandemic hit, causing markets to drop, many businesses to temporarily close, and unemployment to soar to record highs. Inn response, Congress passed relief packages that included provisions that affected retirement plans and waived the RMD's in 2020.
The SECURE Act Changes the RMD Age Permanently
Prior to the SECURE Act passed last year, IRA owners were required to begin taking their Required Minimum Distributions from traditional, SEP and SIMPLE IRAs for the year that they reached age 70½. The deadline for taking this distribution was April 1st of the year after turning 70½. Then, each year after an RMD was required to be taken by December 31. This means two RMDs were required in the IRA owner’s second RMD year if the first RMD was delayed until April 1.
The SECURE Act increases the starting age for RMDs to 72, and the deadline for the first distribution remains as April 1st the year following the year the IRA owner reaches age 72. For those who had not reached age 70½ by December 31, 2019, these new rules apply.
The SECURE Act also changed the beneficiary payment options to eliminate the five-year rule and the life expectancy payment option for most non-spouse beneficiaries, effective for deaths occurring on or after January 1, 2020. Under the new rules, the only payment option for these beneficiaries is to deplete the IRA by the end of the 10th year following the year of death. “Eligible designated beneficiaries” and beneficiaries who inherited IRAs in 2019 or earlier may take beneficiary distributions under the rules in effect before the SECURE Act.
The CARES Act Waives RMDs for 2020
The Coronavirus Aid, Relief and Economic Security Act (the CARES Act) waives the RMD's in calendar year 2020 so that IRA owners and beneficiaries are not forced to take distributions from their IRA's, which may give them time to recoup some losses before resuming the RMD in 2020. This change was put in place because RMDs are calculated based on the prior year-end balance, and the market has dropped significantly since the end of 2019. RMDs calculated for 2020 would require a disproportionately large portion of the now lower account balance to be distributed, which would prematurely deplete the account and lock in investment losses. The 2020 RMD waiver applies to those who:
• Delayed their 2019 RMD until April 1, 2020 – that RMD is not required to be taken
• Have an RMD due by December 31, 2020 – that RMD is not required to be taken
• Use the five-year rule to deplete an Inherited IRA – 2020 is not counted in the five years, essentially providing 6 years to deplete the account (The CARES Act did not address beneficiary distributions under the 10-year rule created by the SECURE Act; future IRS guidance may address this issue.)
If an IRA owner already took an RMD in 2020, they may roll it back into an IRA within 60 days of receiving the distribution. (Future IRS guidance on the RMD waiver could possibly extend the 60-day deadline.)
Possible Tax Relief for Distributions Taken in 2020
Anyone who needs to withdraw money from their IRA may do so. The CARES Act provides tax relief for certain distributions taken in 2020.
If an IRA owner qualifies to take a coronavirus-related distribution as defined under the CARES Act, the IRA owner may take up to $100,000 from the IRA in 2020.
- The distribution is free from the 10% early distribution tax for those under age 59½.
- IRA owners may include the distribution amount in their taxable income over three years to spread out the tax liability.
- IRA owners may also repay the distribution amount to the IRA within three years of the distribution and reclaim any tax paid on the distribution.
To qualify for this tax relief under the CARES Act, an individual must have tested positive for COVID-19, had a spouse or a dependent test positive for COVID-19, experienced adverse financial consequences as a result of being quarantined, furloughed, laid-off, or unable to work due to lack of childcare or reduced work hours as a result of COVID-19, or closed or reduced the hours of a business due to COVID-19.
The RMD waiver and the coronavirus-related distribution relief for 2020 also apply to 401(k) plans, 403(b) plans and governmental 457(b) plans.
*The content provided herein is based on our interpretation of the SECURE and CARES Acts and is not intended to be legal advice or provide a tax opinion. This document is a summary only and not meant to represent all provisions within the SECURE and CARES Acts.