If you are retired and older than age 70 ½, you should be familiar with Required Minimum Distributions, simply called RMDs. In late 2019, Congress passed the SECURE Act which resulted in new RMD rules that went into effect on January 1, 2020. Fast forward a few months, say hello to COVID-19, social distancing, virtual work (in some cases limited or no work), and stock market volatility. In response, Congress passed another bill called the CARES Act which made further changes to RMDs.
Distribution rules surrounding RMDs are confusing enough. Mix in these other disruptions to our normal routines and the result can be overwhelming. The goal of this article is to provide clarity to ensure that you understand what these new bills mean to you and your Required Minimum Distributions.
Owners of qualified accounts … these are IRAs, SEP-IRAs, Simple IRAs, 401(k)s, 403(b)s, and Thrift Savings Plans, and any company sponsored retirement plan that you contributed to with pre-tax dollars, usually through a salary deferral, are typically required to take a minimum distribution from these accounts when they reach a certain age. If RMDs are not taken, the IRS imposes a 50% penalty.
Pre-COVID-19, if you turned 70 ½ in 2019 or earlier:
- You are required to take a 2019 RMD
- If your very first RMD was your 2019 RMD, you had the choice to take that RMD in 2019 or by April 1, 2020.
Pre-COVID-19, if you turn 70 ½ in 2020 or later:
- You are required to take a 2020 RMD
- If your very first RMD is your 2020 RMD, you have the choice to take that RMD in 2020 or by April 1, 2021
Pre-COVID-19, if you were 70 ½ or older and still working:
- You are exempt from taking RMDs from the employer plan where you currently work
- You are required to take RMDs from all other IRAs and all employer sponsored plans where you no longer work
POST-COVID-19:
- All 2020 RMDs are waived
- If you delayed your 2019 RMD to April 1, 2020, your 2019 RMD is waived
- If you stopped working in 2020 and are now required to start taking RMDs, your 2020 RMD is waived
- If you own an inherited/beneficiary IRA or employer sponsored plan, all 2020 RMDs are waived
- If you own an inherited/beneficiary IRA or employer sponsored plan that is subject to the 5-year distribution rules, the year 2020 is disregarded. You now have a total of 6 years to complete your distributions
What happens if you already received your 2020 RMD?
- If you took your 2019 RMD in 2019, no further action is required.
- If you were waiting to take your 2019 RMD by April 1, 2020, and took it prior to April 1, 2020, you may be eligible to rollover your RMD into an IRA.
- If you received your 2019 RMD or 2020 RMD after February 1, 2020, you may be eligible to rollover or convert that distribution by July 15, 2020. (This is a special exception due to COVID-19 and IRS Notice 2020-23. Usually, rollovers must be completed within 60 days of receipt.)
60-day IRA Rollover Rules:
- In a 12-month period, individuals can only make one 60-day rollover from one IRA to another IRA (even if it’s the same IRA). The one-rollover-per-year only pertains to IRA to IRA rollovers. It does not apply to rollovers from employer plans to an IRA or vice-versa. Roth conversions are also not subject to the once-per-year limitation either.
- If your custodian withheld taxes from your 2020 RMD prior to distributing your RMD AND you are eligible to rollover this RMD into an IRA, you can “gross up” your rollover to include any taxes that were withheld to avoid having any of the distribution taxed.
Is a Roth conversion right for you?
- If you roll your RMD back into an IRA, you may want to consider a Roth conversion. Because 2020 RMDs have been waived, the RMD is now considered a regular distribution and is eligible for conversion. (Typically, RMDs are not eligible for Roth conversions.). All future qualified distributions from a Roth IRA will be tax-free.
- Most custodians have specific guidelines on how to convert funds from an IRA to a Roth IRA, so be sure to check with your IRA custodian before attempting a rollover.
Required Minimum Distributions can be complicated. The two new bills introduced by Congress elevate the complexity. Introducing Roth conversion strategies adds to the confusion.
If you have specific questions regarding your RMDs or Roth conversions, please contact your Keen & Pocock advisor. We are always happy to help.
Securities and Advisory Services offered through The Strategic Financial Alliance, Inc. (SFA) – Member FINRA, SIPC. Advisory Services offered through Strategic Blueprint, LLC, a registered investment adviser. SFA and Strategic Blueprint are affiliated through common ownership but otherwise unaffiliated with Keen & Pocock. Certain Keen & Pocock professionals are also registered representatives and/or investment adviser representatives of SFA and Strategic Blueprint.
This information is not intended to be a substitute for specific individualized tax, legal or investment planning advice as individual situations will vary. Keen & Pocock or SFA do not provide tax or legal advice.