The bipartisan COVID-19 stimulus bill just signed by President Trump includes welcome tax relief for retirees: The required minimum distribution rules for Individual Retirement Accounts and 401(k)s are waived for 2020. That means that instead of taking money out this year, retirees can keep their investments growing. This is a repeat of the 2009 RMD holiday during the Great Recession.
For many retirees, who depend on their retirement account withdrawals for basic needs, the RMD holiday is a moot point. They need the money, so they’ll take their RMDs anyway. But for others who might hear the news and stop withdrawals, they need to calculate whether that’s the best move taxwise.
“I wouldn’t just turn off the spigot,” says Ed Slott, a CPA and IRA expert in Rockville Centre, N.Y. “There are opportunities here. You might want to look at your tax bracket and get money out at low rates. If anything is obvious, it’s that tax rates are going to go higher.” Other strategies the RMD holiday favors that you should consider include Roth conversions and IRA charitable rollovers.
First some background. Once you hit a magic age, you must take “required minimum distributions” from your own pretax IRAs and pretax IRAs inherited from a spouse. There’s no minimum distribution required for a Roth IRA (funded with aftertax money) that you or your spouse set up. RMDs are based on your age and your retirement account balance as of the last day of the prior year. So for 2020, retirees were looking at having to take out money based on inflated balances from Dec. 31, 2019 when the Dow Jones average was at 28,462, from accounts that are now worth way less due to the economic downturn (the Dow dropped to just 18,591 earlier this week).
The rules for who needed to take 2020 RMDs were already funky because of the SECURE ACT, passed in late December, which changed the age triggering RMDs from 70 ½ to 72, effective Jan. 1, 2020.
The new required beginning date to take RMDs for an IRA owner is April 1 of the calendar year following the calendar year in which the individual attains age 72. Now, because of the stimulus, no one has to take RMDs for 2020. If you were 70 1/2 in 2019 and didn’t take your first year RMD, you get a two-year RMD holiday in effect, Slott says.
Children, grandchildren and others who have inherited IRAs (pretax IRAs and Roth IRAs) must take annual withdrawals regardless of their own age. They too get an RMD holiday for 2020. (Another SECURE ACT wrinkle: Inherited accounts where the original account owner died on Jan. 1, 2020 or later must be depleted in a 10-year window, except for spouses, and select other heirs). Watch out: Taxpayers who miss an RMD can be hit with a 50% penalty tax, on top of regular tax, on what they should have taken.
If you don’t want your RMD this year, make sure to cancel automatic distributions you’ve set up. Many retirees have RMDs taken out automatically and deposited into a checking account monthly to simulate a paycheck, or annually at year-end. Make sure you contact your custodian to reset your auto preferences.
Already taken out your 2020 RMD but wish you hadn’t? You might be able to roll over distributions you’ve already taken for 2020, says Slott. If you’ve already received a distribution from your own IRA or one inherited from a spouse for 2020, you can roll it back into your IRA within 60 days of receipt.
Consider a Roth conversion. Typically you have to take RMDs out before you can do a Roth conversion. Now, with the RMD holiday, the first pre-tax dollars you take out, you pay the tax, and convert it. You can convert more before being pushed into a higher tax bracket. “You get more for your tax money,” says Slott. If it was an RMD, you still pay the tax, but you can’t convert it.
Consider a charitable IRA rollover. If you’re 70 1/2 or older this year, you can give up to $100,000 directly from your IRA to charity in what’s known as a charitable IRA rollover, or a charitable qualified distribution. Normally it counts towards your RMD. If you give to charity and like most taxpayers take the standard deduction, the charitable IRA rollover still leaves you ahead—even though you don’t have to take the RMD.
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