Originally published March 30, 2020. Updated July 1, 2020.
by Mary Lago, CFP®, CTFA
Executive Vice President, Portfolio and Wealth Management
The Coronavirus Aid Relief and Economic Security (CARES) Act waives required minimum distributions (RMDs) from retirement accounts for 2020.
If you have been subject to RMDs from your retirement accounts, or an inherited IRA, it will be important to review your withdrawal strategy for 2020 and beyond.
While the waiver of RMDs does apply to inherited IRAs, it will be less applicable for those who inherit IRAs due to a death in 2020 as beneficiaries will generally have up to 10 years to withdraw the total balance.
It may still be appropriate for you to take a distribution in 2020 if you need the taxable income to offset other deductions, such as charitable deductions or if you are looking to stabilize and spread your income out over time to manage your tax bracket.
If you don’t need the income, it may make sense to convert any planned distribution into a Roth IRA, using up your lower tax brackets. See additional information on this strategy here.
If you have already taken all or a part of your RMD this year, there may be opportunities to return those funds to the retirement account. Here are two options to discuss further with your portfolio manager and tax advisor.
o Indirect rollover: The IRS typically allows one indirect rollover in any 12-month period and requires the redeposit within 60 days of the withdrawal. The CARES Act increases the flexibility so that IRA owners may recontribute any 2020 withdrawals and avoid taxation of the distribution so long as the recontribution is completed by August 31, 2020. The most recent guidance, IRS Notice 2020-51, further allows inherited IRA owners to recontribute withdrawals and confirms the RMD waiver does not apply to defined-benefit plans.
Note that the full amount withdrawn, including any taxes that were withheld, will need to be redeposited in order to avoid taxation. This may require you to deposit funds into your IRA from another account. For example, if you took a $50,000 RMD and had 40 percent ($20,000) withheld for taxes, you would need to make up that $20,000 from your taxable account in order to return the full $50,000 and avoid paying taxes on the full amount. The $20,000 withheld for taxes would then be treated as taxes paid and possibly refunded when you file your 2020 taxes.
o COVID-19 hardship rules: The new CARES Act expands the hardship withdrawal provisions to cover COVID-19-related hardships and provides repayment options. If you, your spouse, or a dependent have been diagnosed with COVID-19, or experienced adverse financial consequences as a result of the disease (e.g., loss of job, reduced hours, lack of childcare, closed or reduced business operations) you may be able to treat your earlier distribution as a hardship withdrawal. In this case, you would have up to three years to recontribute the amount to your retirement account.
Qualified charitable distributions (QCDs) are still allowed: For those over age 70½, distributions of up to $100,000 directly to charity are still possible, but other charitable giving strategies will likely be more tax advantageous for 2020. When a distribution from a traditional IRA to charity is replacing a distribution to the IRA owner, the strategy reduces taxable income and is generally escaping ordinary income tax rates. However, with no RMD required, the IRA owner is no longer avoiding taxable income, but will still not receive a deduction for the charitable gift on their income tax returns. It may be more advisable to contribute either cash or appreciated securities depending on overall financial circumstances.
Ferguson Wellman and West Bearing do not provide tax or legal advice. This material has been prepared for general educational and informational purposes only and not as a substitute for qualified counsel. You should consult qualified professionals to understand how this information may, or may not, apply specifically to you.