Don't Miss the August 31 Deadline to Return 2020 Required Minimum Distributions
Retirement Daily Guest Contributor
By William Harris
If you’re like me, watching with concern as my retired parents grapple with how to stay safe in this environment, the last thing you want loved ones to do is have to worry even more than usual about money and the security of their future.
The coronavirus has created a feeling of uncertainty, anxiety, and powerlessness over everyone’s physical, emotional, and financial health and well-being. So much of what is happening is outside of our control, leaving people at every age and stage of life feeling vulnerable, but especially retirees and people nearing retirement.
If you’re concerned about your own – or a loved one’s – financial future, it’s important to take advantage of every relief opportunity possible.
With the stock market in a state of turmoil, most retirees are eyeing their IRAs with concern as they watch the value of their portfolio fluctuate.
The CARES Act waiver provides some financial relief to retirees, including:
- the ability to forego your required minimum distributions (RMD);
- penalty-free distributions; and
- rollback RMDs
Avoid RMDs for One Year
The RMD provision of the CARES Act effectively allows Americans to leave their qualified retirement portfolio alone for the next year.
As you may already know, you are required to make RMDs if your money is invested in a 401(k), SEP IRA, traditional IRA, or SIMPLE IRA and inherited IRAs. Prior to 2020, RMDs were required to begin after the age of 70 ½, however, at the end of 2019, the federal government increased the age to 72 for RMDs with the SECURE Act.
With the CARES Act waiver, you have the flexibility to suspend required distributions without the steep tax penalty, which was 50% of a required minimum distribution.
In 2020, RMDs have been completely suspended as a direct result of the coronavirus pandemic. In addition, the CARES Act covers anyone who reached 70.5 years of age in 2019 who previously would have been required to take their first RMD by the start date of April 1, 2020.
As a retiree, this allows you to avoid liquidating assets at a reduced cost and the resulting drop in your account balance(s). This waiver applies not only to the accounts you own but also to any that you inherited from another individual.
Penalty-Free Distributions under the CARES Act
Pre-retirees (under age 59 ½) may also want to make use of the penalty-free distributions enabled by the CARES Act. You can access to up to $100,000 from any employer-sponsored plan or IRA in 2020 without the typical 10% early withdrawal penalty. Any distributions can be spread equally over three years.
Eligibility requirements for a penalty-free distribution include:
- If you or your spouse or a dependent have been diagnosed with COVID-19
- If you or your spouse, or anyone in your household suffers adverse financial hardships as a result of COVID-19 because of a layoff, furlough, inability to work due to lack of child care, reduction in work hours, closing or reducing of the business that you operate or own, experiencing a reduction in pay or self-employment income.
- If you have a job offer that was rescinded or the start date for the new position has been delayed.
Rollover Extension for RMDs Taken in 2020
On June 23rd, the IRS announced that if you had already received a 2020 required distribution then you could roll it back into the IRA anytime up to August 31, 2020. The repayment is not subject to the singular 12-month rollover limitation (also known as the once per year rollover rule). Specifically, the waiver states:
“To assist plan participants who have already received distributions in 2020, the Treasury Department and the IRS, pursuant to § 402(c)(3)(B), are extending the 60-day rollover period for any payments described in section III.A and section III.B of this notice so that the deadline for rolling over such a payment will not be before August 31, 2020. For example, if a participant received a single-sum distribution in January 2020, part of which was treated as ineligible for rollover because it was considered an RMD, that participant will have until August 31, 2020, to roll over that part of the distribution. In addition, the Treasury Department and the IRS, pursuant to § 408(d)(3)(I), are extending the 60-day rollover period for IRA distributions in 2020 that would have been an RMD in 2020 but for section 2203 of the CARES Act or section 114 of the SECURE Act, so that the deadline for rolling over such distributions will not be before August 31, 2020.”
By foregoing your yearly RMDs, you can potentially gain back any losses sustained and hold tight until market conditions stabilize. Most importantly, avoid income tax that would be due as a result of the distribution.
In a world where so much feels beyond our control, it’s refreshing to know there are things you can do to protect your hard-earned assets and focus on what is truly important: keeping yourself and your loved ones safe and protected.
About the author: William Harris
Bill Harris is a Retirement Management Advisor (RMA), a CERTIFIED FINANCIAL PLANNER™ practitioner (CFP) and a Master Elite Ed Slott Advisor. He is president of WH Cornerstone Investments, a financial advisory firm located in Kingston, MA. Learn more at www.whcornerstone.com