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REQUIRED MINIMUM DISTRIBUTIONS WAIVED FOR 2020

REQUIRED MINIMUM DISTRIBUTIONS WAIVED FOR 2020

Under the recently signed CARES Act, Congress recognized the need to offer relief for taxpayers who are subject to the rules for Required Minimum Distributions (RMD) from retirement plans. Congress felt that because the 2020 RMDs would be calculated based on the market value on December 31, 2019, it would be punitive to subject taxpayers to liquidating their accounts given the current market conditions. Congress therefore waived the requirement to take RMDs in 2020. Taxpayers who rely on the RMD for living expenses may still need the funds from their retirement accounts, but amounts could be reduced or entirely deferred if possible.

If you have already taken your RMD in 2020, there may be an opportunity to avoid taxation of the RMD by replacing the funds or rolling the RMD into another IRA. Generally, the IRS would allow you to replace or roll the funds over within 60 days of the withdrawal to avoid taxation of the distribution. Recognizing that it may already be too late for many taxpayers to roll the RMD as the 60-day window may have already expired, the IRS has granted additional relief. Based on IRS Notice 2020-23, for RMDs taken between February 1, 2020 and May 15, 2020, the taxpayer has until July 15, 2020 to roll the funds over to meet 60-day rule. Please note that the relief does not apply to RMDs taken in January 2020 or after May 15, 2020, those RMDs would have to be rolled within 60 days of the distribution to avoid taxation. It is possible that there could be further changes to these rules as the year progresses.

Another option is also available to those who have already taken their RMD for 2020. They could consider a conversion of the distribution to a Roth IRA. Under normal IRS rules, an RMD is not eligible to be rolled over or converted, but because RMDs are waived for 2020, any distribution taken would be eligible for conversion. Similar to the rollover rules discussed above, the conversion must be done within 60 days of the distribution. Similar to above, if the distribution was taken between February 1, 2020 and May 15, 2020, the taxpayer has until July 15, 2020 to complete the conversion. Distributions in January 2020 would not be eligible for the conversion, while distributions after May 15, 2020 will have to be converted within 60 days of the distribution. With the possibility of taxpayers being in lower tax situations this year, it may make sense to look into paying a bit of tax now to enjoy tax-free growth and distributions later in life. You should also consider that Roth IRAs are not subject to RMD rules so the funds in those types of accounts can continue to grow tax-free.

The rollover and conversion rules contain many traps for the unwary. The rules must be navigated properly or there could be severe unintended consequences. Therefore, it is best to discuss your rollover and conversion options with a qualified tax advisory services professional prior to taking any action.

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