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RMDs Are On Hold for 2020. Now What?

How to decide whether you still want to take them.

Christine Benz: Hi, I'm Christine Benz from Morningstar. Changes are afoot to required minimum distributions for 2020. Joining me to discuss potential implications for your retirement plan is Maria Bruno. She's director of U.S. Wealth Planning Research for Vanguard, and she's also a Certified Financial Planner. 

Maria, thank you so much for being here.

Maria Bruno: Hi Christine, thanks for having me.

Benz: Maria, there's a lot going on with required minimum distributions. Let's take it a little bit back into 2019 and discuss the SECURE Act and the changes for the RMD age. Can you summarize that?

Bruno: Christine, the SECURE Act that passed in December of 2019, essentially moved the RMD age from 70.5 to age 72. So it pushed that RMD, the start, back. The important thing to note was that if you had turned 70.5 last year, you are still required to take the distribution by April 1 of 2020. But if you would have turned 70.5 this year in 2020, then you wouldn't have to take the distribution until April 1 the year following when you turn 72.

Benz: The SECURE Act also had some implications for IRA beneficiaries--essentially it was the death knell of the stretch IRA, right?

Bruno: Correct. So previously, if you inherited an IRA, you could take distributions based upon your life expectancy. With the passage of the act, it basically eliminated that and is requiring nonspouse beneficiaries--there's a few other provisions, like minors--but essentially it now limits the distribution for beneficiaries to 10 years.

Benz: Now I want to talk about the CARES Act ushered in in 2020 in response to the pandemic. Effectively, that puts a pause on required minimum distributions for most people. Why is that? What was the idea behind pausing RMDs for this year?

Bruno: When you take RMDs, it is subject to income taxation as well. So there was a couple of factors probably going on there in that the markets were volatile earlier in the year and realizing that a number of individuals were stuck in a financial pinch as a result of everything that was going on. So, this has happened before where they give a reprieve on the RMD given the current economic conditions, for instance. So we're seeing that this year as well, where we get a free pass, if you will, on required distributions.

Benz: Now, what about people who already took their RMDs for 2020, and they don't need the money and they maybe want to undo that. Is that a possibility?

Bruno: It is actually. So if you have taken your RMD this year and you want to roll that back, you have the opportunity to do so. You have until Aug. 31. They recently extended that to Aug. 31 of this year. I think the one thing that's important to clarify, as I'd mentioned, if you turned 70.5 last year, you were required to take the distribution by April 1 of 2020. So if you did take the RMD last year, that was last year, so that had to have been met. But if you were in a position where you either took the distribution this year, again, assuming you turned 70.5 last year, if you took it by April 1, you can roll that back. If you haven't taken an RMD, then of course you don't necessarily need to this year.

Benz: What we've been hearing since the CARES Act passed is that retirees who can afford to do so should forgo their required minimum distributions for 2020. Let's discuss the potential benefits if you are in a position of not needing your RMDs--you've got funds elsewhere that you can live on for 2020--why would you want to do that?

Bruno: If you're in the fortunate position where you don't need that money to live off of, you've got some flexibility. And by deferring that RMD, there's a couple of benefits to that. First and foremost, the account continues to grow tax-advantaged. So if you don't take the distribution this year, obviously it's not going to affect your income tax for this year. So you get a break on the taxes this year and the IRA continues to grow. That's the main benefit of the deferral.

Benz: How about any other strategies? Say, I find myself in this temporarily low tax year because I decided not to take my RMD for 2020. Are there any things that I could do potentially to improve my tax position going forward?

Bruno: It is interesting because it does offer flexibility. I mean, obviously if you're in a situation where you need that RMD for retirement spending, then many individuals will take the RMD and use it for spending purposes. If you're in the position where you don't need that, then you have flexibility. So just because you can defer it does not necessarily mean that you should defer it. So really look at this year's tax picture and see whether it makes sense to actually take all or part of that distribution because there may be benefits to a couple of things. One, if you're worried about what the tax landscape may look like in the next few years, for instance, if there's any policy changes and you might have some concerns there, then you might want to consider taking some distributions from the IRA.

Likewise, if you're in a position where you might have some offset, perhaps you want to use that income and maybe offset it with some charitable giving, perhaps the additional income can be offset by some deductions. So there is probably some tax-planning opportunities there. And if you do have a very large IRA and you're subjected to large RMDs, you might want to think through what that would mean--this year's tax picture versus the next several years--because it may make sense to smooth that and still continue that RMD. You might be able to do charitable contributions, like a qualified charitable distribution from the IRA, that's always an option as well, so you do have flexibility. What it has removed is the required piece of that, the required minimum distribution.

Benz: Well, it sounds like this is a good spot to get some tax help. You also say it's important to remember if you are a retiree who was put in place, plan where your RMD gets automatically paid out to so you don't forget that you'd want to switch that off, right?

Bruno: Yeah, absolutely. So if you are in an automated service that calculates and distributes the required minimum distribution, then you certainly want to let your investment provider know and then they can disable that or you could do that online. Absolutely, that's a good practical tip.

Benz: Maria, you always have such great insights for us. Thank you so much for being here today.

Bruno: Thank you, Christine.

Benz: Thanks for watching. I'm Christine Benz from