On March 27th, the government passed the most significant economic stimulus package ever signed into law; Coronavirus Aid, Relief and Economic Security Act of 2020, otherwise known as the CARES Act. Like most government documents, it’s long, at over 800 pages. I am confident that even if you googled ways to beat boredom during the stay at home order, no one would suggest reading the CARES Act in its entirety.
With anything, the underlying question is, how does this impact me? The CARES Act’s potential benefits go much further than the most widely known benefit of the deposit of stimulus money into your account. The CARES Act includes financial planning changes that can help you. Knowing about your options and the potential benefits can lead to better financial decisions and even add money to your pocket!
RMD RULES TAKE A HIATUS FOR 2020
Required Minimum Distribution (RMD) refers to the minimum amount of money needed to be taken annually from a retirement account either once an owner reaches a certain age or when someone has inherited an IRA from a non-spouse. They are those pesky distributions the government makes you take each year so the IRS can tax you. When the SECURE Act passed in December of 2019, the RMD age-adjusted to 72. Those new requirements are temporarily changed, and it makes things even more confusing.
Under the CARES act, all RMD requirements for 2020 are removed, including RMDs for inherited IRAs. The suspension is at your discretion. If you do not need the distribution or you are in a position to reduce the amount of your distribution, you should consider the potential benefits of suspending or reducing your RMD.
Recent market volatility has created losses even in the most diversified portfolios. Selling assets to cover cash needs would lock in recent losses. Suspending the RMD could allow funds to stay invested and participate in any potential gains that we may experience during the remainder of the year. Even if your funds were already in cash or a money market position in preparation of your annual distribution, you could consider using the extra money to rebalance your account to your original target allocations.
Not only will suspending your RMD create potential market opportunity, but it will also help you avoid current taxation. Required minimum distributions are considered taxable income in the year you receive funds and are taxed at your ordinary-income rates. By not taking the RMD, you reduce the amount of money you need to send to your least favorite family member, Uncle Sam. It is also possible that suspending your RMD reduces your marginal tax bracket.
NEW IRS GUIDANCE- 2020 RMD OPTIONS
Many individuals received RMDs before the CARES Act was signed into law and were concerned that they would not be able to take advantage of the suspension. Typically rollovers are subject to a 60-day window, are allowed only once per year, and exclude RMDs. Based on the original guidance, individuals receiving RMDs in January were out of luck. Besides, the once per year rule prevented those from distributing RMDs monthly from rolling over each payment. The new guidance makes adjustments to each of those items.
On June 23rd, the IRS issued a release allowing individuals with unwanted 2020 RMDs the option to rollover the distribution to an IRA or company plan by August 31st, 2020. Since the CARES Act waived 2020 RMDs, amounts received during 2020 are technically not RMDs and are now eligible for rollover. The extended notice covers RMDs taken at any time in 2020. The IRS also notes that RMD repayments will not count against the once per year rollover, allowing all monthly RMDs to participate in the rollover allowance. They even made an exception for non-spouse beneficiaries to repay inherited IRA RMDs.
The recent guidance could allow for planning opportunities for those who would generally be subject to RMD rules and regulations. If you have the chance to make lemonade from lemons, take it! If you are unsure of how the updated rules apply in your situation, contact us at info@RiverCityWealth.com.