As difficult as this year has been for many of us, there are still some positive opportunities for individuals to take advantage of, particularly regarding financial planning. In a notable development created by the CARES Act — which was enacted earlier this year in an effort to stem the financial effects of the COVID-19 pandemic — required minimum distributions (RMDs) have been waived for most retirement accounts for calendar year 2020.
RMDs are the minimum withdrawals most retirement plan owners must take annually upon reaching the year they turn 72 (70 ½ for those who reached that age before Jan. 1, 2020). The waiver on those withdrawals is welcome for individuals who do not always want to take a distribution from their retirement accounts but have nevertheless been required to do so previously because of their age. Instead, they can forgo the distribution for at least this year, maintaining their plan’s balance.
Defined Contribution plans of all types and IRA accounts, including inherited IRA’s, were granted this waiver for 2020. However, Defined Benefit plans, or employer-sponsored plans, were not granted any such waiver under the CARES Act. The distribution is still required to be made by the company to the entitled individual recipients.
Planning for Distributed RMD’s
If you have already taken, or will be taking, an RMD this year, you have several options.
- Any distributions taken this year which would have been part of your RMD can be returned to your account, without tax consequences, if done by August 31, 2020. This is true of the total distribution taken — no matter if it was a lump sum or periodic distributions. Any amount not returned, including amounts withheld for taxes from the initial distribution, will remain taxable for 2020.
- The distribution can be converted to a Roth IRA this year. Typically, this is not the case, but these distributions are no longer considered RMD’s and are not barred from Roth conversion. This Roth conversion option will still leave the distribution subject to tax in 2020, however it will allow the taxpayer to convert the distribution amount from a traditional retirement account to a Roth account, which has future favorable tax attributes.
- An individual is also able to simply keep the distribution. There are not any limitations on distributions that can be taken once you reach the age of RMD, so keeping the money and paying the tax is also an acceptable solution.
- Qualified Charitable Donations (QCD’s) are still allowed in 2020. Even though the required distributions were waived, eligible individuals may still make QCDs. This deduction is not tied to the RMD, yet many people consider them jointly, as the age requirement has historically been the same.
At McClintock & Associates, we are well-versed in the CARES Act, these retirement distribution changes and many other planning opportunities that have come to light in these uncertain times.
If you have any questions on this topic or would like to make an appointment to discuss your other personal planning options with one of our team members, please feel free to reach out at any time.
