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.
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