Pandemic Tip: New Rules for Required Minimum Distributions (RMDs)

René Nourse, CFP® |

So far, 2020 has marked a year of significant changes across so many boards that it will definitely create a New Normal lifestyle for all of us. Obviously, the impact of the COVID-19 virus has had a significant impact on our health environment, which has impacted our economy and the recognition of some significant tax law changes. We have had two major tax law adjustments just since December 2019. Being as knowledgeable about these changes and how they may impact your finances can make a big difference. Below are brief points that can provide you with an overview of some of the changes.

RMD 2020 Rules

For 2020, all RMDs have been waived, including from employer-provided plans, IRAs, and inherited IRA accounts. Not needing to pull funds from your retirement accounts will help to reduce your taxable income since distributions are reported as revenue. In addition, if you turned 70½ in 2019 and elected to defer taking it until 2020, both your 2019 and 2020 RMD are waived until 2021.

If you have already withdrawn the funds for your 2020 RMD, you may have the opportunity to rollover the funds and put them back into your retirement account. Normally, rollovers must be completed within 60 days. However, for 2020 there is an exception. If your RMD was taken between February 1st and May 15th, your funds can be rolled back into your retirement account by July 15th, 2020, and will not be reportable as taxable income. Be aware however, that any withdrawals taken before February 15th or after May 15th are subject to the 60-day rollover rule.

Qualified Charitable Distributions (QCDs)

If you choose to make a QCD from your IRA this year, you can still do so. As always, the withdrawal is not subject to taxes. The benefits of doing this include continuing to support nonprofits which have been experiencing significant cash flow challenges, as well as potentially reducing your account value, which could produce a lower RMD for 2021. Under the SECURE Act, as you might know, the RMD age has increased from 70½ to 72. However, as long as the owner is at least 70½, a QCD can still be made to a charitable organization even if an RMD is not required for this year.

Inherited IRAs

The new 2020 RMD waiver rules also apply to beneficiaries of inherited IRA accounts. The distribution requirement will be waived until 2021 — and, again, if a distribution was taken between February 1st and May 15th, then the owner has until July 15th to rollover all or some of the inherited IRA funds back into the IRA account.

If an IRA owner passes away in 2020 before taking their RMD, the beneficiaries can suspend taking the RMD until 2021. Under the SECURE Act, which was passed in December 2019, other than a spouse, Eligible Designated Beneficiaries are defined as (i) a disabled or chronically ill individual, (ii) a beneficiary who is less than 10 years younger than the account holder, or (iii) a minor child of the account holder. An Eligible Designated Beneficiary may still withdraw the inherited retirement account over his or her life expectancy. For noneligible designated beneficiaries, RMDs are required to be withdrawn over a 10-year period. For IRA owners who passed away prior to 2020, distributions are subject to maximum distribution payout of over 5-year rule; however, the beneficiary distribution is also suspended for 2020.

While this post is about RMDs, there are other elements of the SECURE and the CARES Acts that we will share with you over the coming weeks. Since these tax law changes happened so quickly, the IRS is still working through and updating their processes and timelines. We will keep you posted.