The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) contains significant changes to the 2020 required minimum distribution rules applicable to IRAs, 401(k)s, 403(b)s, and other similar Qualified Retirement Plans (collectively “QRPs”).
The CARES Act waives required minimum distributions from IRAs and QRPs for calendar year 2020. This change can result in income tax savings for owners of traditional IRAs and QRPs that are affected by this change.
By way of background, required minimum distributions obligate certain IRA and QRP account owners to withdraw a minimum amount from these accounts each year. Until this year, required minimum distributions applied to owners of IRAs and QRPs who attained age 70 ½. The Setting Every Community Up for Retirement Enhancement Act of 2019, better known as the SECURE Act, increased the minimum age for required distributions to 72 starting in 2020.
From a tax perspective, minimizing the distributions from IRAs and QRPs defers the income taxation of those assets. Because required minimum distributions are not required for 2020, the tax that would have resulted from a 2020 distribution is avoided. Owners of Roth Accounts also benefit by allowing the distribution to grow tax-free for an additional year. This waiver also limits the adverse effects caused by the substantially higher value of stocks on December 31, 2019, which would have been used to compute the 2020 distributions.
For some account owners who already took distributions in 2020, the IRS recently provided additional relief by extending the time for making a 60-day rollover of a distribution already received. IRS Notice 2020-23 extended the deadline for time sensitive actions occurring between April 1 and July 15. This means that if you took a required minimum distribution on or after February 1, you now have until July 15th to roll that distribution into an IRA or return the distribution if the account custodian permits it. You are permitted to roll 100% of the distribution even if taxes were withheld.
For individuals who took a distribution in January 2020, there is some relief available if you can demonstrate a coronavirus impact as defined by the CARES Act. However, there is no relief under current rules for individuals that took distributions in January 2020 who cannot demonstrate a coronavirus impact. It is possible that additional guidance will be forthcoming. We recommend continuing to monitor any new pronouncements from the IRS on the waiver and rollover of required minimum distributions.
This has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal, and accounting advisors before engaging in any transaction.