Editor's note: Read the latest on how the coronavirus is rattling the markets and what investors can do to navigate it.
The CARES Act, which was signed into law at the end of March, was designed to address a broad swath of economic issues related to the novel coronavirus pandemic, especially workers who have lost jobs and companies that have seen their businesses decline.
But the law also has implications for retirees. Notably, Social Security beneficiaries who have adjusted gross incomes below certain thresholds will receive stimulus payments, called “Recovery Rebates.”
Additionally, the CARES Act suspends required minimum distributions that would otherwise be due for 2020. As was the case in 2009, when RMDs were last suspended, the goal of this latest RMD pause is to keep investors from having to tap their tax-deferred accounts when they’re down, leaving fewer assets in place to recover when the market eventually does. In fact, the 2020 RMD suspension is arguably even more necessary than 2009’s. That’s because 2020 RMDs would have been based on year-end 2019 balances, a tremendous year for both stocks and bonds. In other words, 2020 RMDs would have been outsize at a time when investor account balances were down.
The hold on RMDs applies to IRAs and 401(k)s, as well as other types of defined-contribution plans such as 403(b)s and 457s. It doesn’t, however, apply to cash-balance plans, a type of defined-benefit plan. And Roth IRAs aren’t subject to RMDs at all, though Roth 401(k)s are. The RMD suspension applies not only to people who are taking distributions from their own retirement accounts, but also to people with inherited IRAs that are subject to RMDs.
Because the CARES Act follows hot on the heels of the SECURE Act provision that pushed the RMD starting age out to 72 (from 70.5) starting with 2020, let’s tackle some common questions about what's changing for RMDs in 2020.
Q: I need my required minimum distributions to live on. Do I have to delay withdrawals? And if I do take a withdrawal, do you have any tips for not inflicting any more pain on my retirement accounts than I need to?
A: The suspension on RMDs for 2020 simply means that distributions for 2020 aren't mandatory; you can still take money out if you need to. But if you do take distributions from your retirement accounts this year, just remember the interplay between portfolio withdrawals in bear markets and portfolio longevity: If you can possibly take out less after your portfolio has fallen, that will leave more assets in place to recover when the market eventually does. Ideally your portfolio setup would also allow for surgical withdrawals of securities that have held up relatively well during the downturn, like cash and bonds, while leaving depressed equity assets alone.
Q: Are there any tax reasons why I might want to take a distribution from my IRA in 2020, even if I'm not required to do so?
A: One of the first rules of tax management is to defer income for as long as possible. Thus, as retirement- and tax-planning expert Ed Slott points out, most RMD-subject investors will probably want to take advantage of the current pause on RMDs unless they actually need the funds to live on. However, one big reason to take a withdrawal in 2020 even though you're not required to do so would be if your other income in 2020 is likely to be unusually low relative to what you expect in the future. In that case, taking withdrawals from your accounts this year may still be beneficial because you would be paying taxes on those withdrawals at a lower rate than may be the case in the future. In addition, by accelerating withdrawals you reduce the amount of assets that will be subject to RMDs when they commence again, presumably next year. Withdrawals from tax-sheltered accounts won't directly reduce RMDs in future years: For example, if your RMD for 2021 was $25,000 and you took out $10,000 this year, your 2021 RMD won't be $15,000. But taking withdrawals now can help shrink the whole amount that's eventually subject to taxes. Alternatively, Slott suggests that retirees use the RMD pause as an opportunity to convert traditional IRA assets to Roth.
Whether you take a withdrawal or conduct a conversion, get some tax advice before deciding to accelerate income from your tax-sheltered accounts to help ensure that doing so won’t trigger unintended consequences. And remember: Pulling money from your tax-sheltered account doesn’t mean you have to spend it. Instead, you can keep those funds invested elsewhere, such as in a taxable brokerage account or even in a Roth IRA if you or your spouse has enough earned income to cover the contribution amount.
Q: Are qualified charitable distributions allowed for 2020? And is there really a benefit if RMDs are waived?
A: Even though RMDs are waived for 2020, you can still contribute up to $100,000 of your IRA to charity via the qualified charitable distribution, or QCD. It's also important to note that you don't need to be 72—the new RMD age—to take advantage of the QCD. That's because the SECURE Act, which was signed into law in late 2019, allows people who are age 70.5 to take advantage of the QCD.
In normal years, one of the big benefits of the QCD is that any amounts steered to qualified charities are deemed to satisfy your RMDs. That’s obviously not a benefit in 2020, as RMDs are waived. However, a QCD in 2020 reduces future RMDs by reducing your overall IRA balance. Moreover, the QCD allows you to contribute pretax dollars to charity.
Q: What if I turned 70.5 in 2019 but delayed my first RMD from 2019 to April 1 of this year? Am I able to skip it until 2021?
A: You're in luck, procrastinator! According to Jeff Levine, lead financial planning nerd for Kitces.com, the CARES Act's suspension of RMDs applies not just to 2020 RMDs "but any RMD that would otherwise need to be taken in 2020." That means that if you turned 70.5 last year but didn't take your RMD by year-end, instead pushing it into this year to take advantage of the extension to April 1 that first-time RMD takers can use, you won't have to take your 2019 RMD in 2020, either. Moreover, you can skirt your 2020 RMD as well.
Q: What if I already took my RMD for 2020?
A: You have options. Under normal rules, an individual would have 60 days to get the money back into the IRA for it to count as a rollover, meaning that no taxes would apply to the withdrawal, assuming the funds stayed in an IRA. But according to Andy Ives from the Slott Report, a recently issued IRS notice widens that window further. Specifically, individuals who took RMDs between Feb. 1 and May 15 have until July 15, 2020, to roll over the money into an IRA.
But remember: You're allowed only one such rollover per 12-month period unless the earlier rollover was a trustee-to-trustee rollover. If you did a distribution followed by a rollover in the past 12 months (not a trustee-to-trustee rollover), another rollover within that same 12-month window would be off-limits. Moreover, it's important to note that such a rollover is available only if you're taking RMDs from your own retirement account; distributions from inherited IRAs can't be rolled over.
Editor's note: This article was updated to clarify the rules regarding permitted rollovers within a 12-month window. A previous version was published on April 16, 2020.