Opportunity Alert! The CARES Act impact on retirement plan distributions in 2020
Are you planning on a retirement account distribution this year? Whether you had planned on required distributions but wish you could leave funds alone, or you now need a distribution to make financial ends meet, the CARES Act has some very important provisions that could change decisions about your retirement accounts.
Were you subject to a required minimum distribution (RMD) in 2020? Under the CARES Act, 2020 RMDs are waived. The relief provided by this provision is broad and applies to Traditional IRAs, SEP IRAs, and SIMPLE IRAs, as well as 401(k), 403(b), and 457(b) plans. Additionally, this applies to both retirement account owners themselves, as well as to beneficiaries taking stretch distributions.
Importantly, while distributions are not required for 2020, they are still allowed. This includes Qualified Charitable Distributions (QCDs) for IRA owners and IRA beneficiaries age 70 1/2 or older. And so an individual is still able to use entirely pre-tax dollars to satisfy some or all of their charitable intent.
If you are an account owner and have already taken your 2020 RMD, in whole or in part, you may be able to make a 60-day rollover to return any unwanted distributions. It’s important to remember also that the asset returned must be the same as what was originally distributed. Cash distributions must be returned as cash. If a distribution was in shares of a fund or stock, the exact shares must be returned in the rollover.
If that 60-day period as already passed, or if you need to take an income distribution, another option is a Coronavirus-Related Distribution, as defined in the CARES Act. If you meet the criteria for this special type of distribution, you can complete a rollover to return any 2020 distributions, within three years of such distributions.
So, what is the criteria you may wonder?
- Up to $100,000 total from IRAs and/or employer plans
- Must be made in 2020
- Must be due to one of the following reasons: (1) Have been diagnosed with COVID-19, (2) Have a spouse/dependent diagnosed with COVID-19, (3) Have experienced adverse financial consequences as a result of being quarantined, furloughed, laid off, or having work hours reduced because of the disease, (4) Are unable to work because they lack childcare as a result of the disease, or (5) Own a business that closed or is operating under reduced hours because of the disease.
The benefits to these special distributions are:
- Exempt from any 10% early withdrawal penalty
- Not subject to any mandatory tax withholding
- Eligible to be repaid (rolled back into the account) over 3 years
- Still taxable but income may be spread evenly over 3 years if desired
Keep in mind that these rollover options do not apply to beneficiaries of inherited accounts, because beneficiaries are never eligible for rollovers. The one exception is for a spouse who chose to remain a beneficiary of the deceased spouse’s retirement account. In that case, they may be eligible to put the RMD back into their own retirement account, as a spousal rollover.
Finally, the CARES Act addresses trusts or estates that are considered a Non-Designated Beneficiary of a retirement account. In general, when these types of beneficiaries inherit a retirement account from someone who dies prior to reaching their RMD beginning date, the beneficiary must distribute the entire account by the end of the fifth year following the account owner’s death—referred to as the 5-Year Rule. The CARES Act allows you to disregard 2020 for purposes of calculating your distribution timeframe—essentially creating a 6-year rule.
For all of APC’s current portfolio management clients, we have either already contacted you, or will be contacting you within the next few weeks to discuss your individual situation and any actions that may be appropriate for your income in 2020 as well as longer-term planning.
How can APC help?