“Off The Wall” Blog
Unique, straight-forward, unfiltered opinion on topics of concern for individuals with newfound wealth.
While the depth and duration of the economic impacts of this pandemic are still to be determined, Congress has created some certainty with their CARES Act, which helps wealth advisors work with clients to navigate these challenging times. The CARES Act touches many aspects of your financial life, but we will focus on the most pertinent when it comes to Private Wealth Design considerations for 2020.
Suspension of Required Minimum Distributions (RMD)
Thanks to the CARES Act, nobody has to take a 2020 RMD.
This means that anyone who turned 70½ in 2019 and deferred their first RMD to 2020 is no longer required to take their 2019 RMD that would have been due April 1, 2020 OR their 2020 RMD. Outside of Qualified Charitable Contributions, this may be the best gift Congress has given retirees subject to RMDs.
An RMD is the minimum amount a retiree must withdraw from their account during the year. Historically, this applied to people age 70½ and above, but with the passing of the SECURE Act, RMDs are not required to begin until age 72 for those retirees under 70½ in 2019.
What if I already took my RMD and regret it?
If you are 60 days beyond taking your RMD, there’s no provision explicitly allowing the distribution to be rolled back into your IRA. However, Congress has created an allowance for “Coronavirus Related Distributions” (more on that below) of up to $100,000 that can be put back into IRAs over a three-year period. Congress was not explicit in the CARES Act on the application of this provision to those over 59½, and the IRS has not provided guidance at this time.
It’s all about timing. When you take money out of an IRA, you can do a “60-day rollover”, effectively allowing you to put the funds back into the IRA and avoid taxes. It’s also important to note that you may only perform one indirect rollover per 12–month period. For most retirees, that shouldn’t be a problem.
Can I still take my RMD out or complete Qualified Charitable Distributions?
There’s nothing stopping you from taking money out of your IRA other than a down market.
Qualified Charitable Distributions are an important part of many retirees’ estate planning strategies. There may be valid reasons to distribute funds from your IRA (reduce future taxable income, reduce the size of your estate, etc.) and they should be discussed in the context of your broader goals.
Reduced Penalties & Taxes for Younger IRA Owners
The CARES Act will allow penalty-free “Coronavirus Related Distributions” up to $100,000 for those under 59½. The definition of “impact” is seemingly very broad and appears to apply to most Americans. But proceed with caution, because while it’s probable the IRS may take a liberal view in the spirit of economic relief, it is not assured.
Am I still taxed on money I take out of my IRA?
The government still expects taxes to be paid on money that hasn’t already been taxed – i.e. pre-tax contributions that have lowered your taxable income and tax-deferred earnings. However:
- The taxable income from the distribution will be spread over 3 years (2020, 2021, and 2022), meaning there won’t be a massive tax-hit in a critical year for many Americans.
- You can pay the taxes on the full amount in 2020 – this may be a good idea if you expect your income to be significantly lower in 2020 than in the next two years due to furlough or layoffs.
- An exception to the 60-day rollover rule will be made for “Coronavirus Related Distributions”, allowing the distribution to be rolled back into the retirement account over a 3–year period. You can replenish your retirement accounts AND claim a refund on taxes paid attributable to the amount rolled back in.
If you are considering this option, we are here to help make sense of rules as they apply to your specific situation and Private Wealth Design.
Any considerations I’m missing?
There are drawbacks to consider when it comes to using your IRA as a source of emergency funds.
- You are withdrawing money in a down market, locking in losses when you sell your investments.
- Even though the funds can be replaced via a 3–year rollover period, you will likely miss the recovery in the market if it takes you until the tail end of that period to put money back into your IRA. This impact is amplified by the compounding effect of tax-deferred income.
There are no easy answers to the unprecedented challenges and hard choices that we face. Now more than ever, it’s important to understand that a successful plan is one that you continuously revisit, adapt, and adjust to suit your own life and goals as they evolve.
Important Disclosure Information
Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Monument Wealth Management), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful.
All indexes referenced are unmanaged and cannot be invested into directly. The economic forecasts set forth may not develop as predicted. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from Monument Wealth Management. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. Monument Wealth Management is neither a law firm nor a certified public accounting firm and no portion of the blog content should be construed as legal or accounting advice.
A copy of Monument Wealth Management’s current written disclosure statement discussing our advisory services and fees is available for review upon request.
Emily M. Harper, CFP®
Vice President & Partner
Emily’s background in the financial industry began after she graduated from the University of Virginia. During a seven-year run in various advisory and leadership roles at a global asset management firm, Emily acquired four industry licenses, a certificate in Financial Planning from UVA, and her CERTIFIED FINANCIAL PLANNER™ designation.
Stay up to date!
Subscribe to our “Off the Wall” Blog for articles and videos on all things wealth management, by all members of our Team. Unlike Facebook, we will never share your data with anyone.