Required Minimum Distributions Waived for 2020
Under normal circumstances, retirement plan account owners must withdraw required minimum distributions (RMDs) annually starting with the year they reach 72 (70 ½ if you reach 70 ½ before January 1, 2020). The CARES Act suspends RMDs for 2020. What does this mean? In short, if you haven’t already taken your RMD for the year, you don’t have to. If you have, you may be able to roll the distribution back into your retirement account. The one-year suspension of the RMD extends to inherited IRAs where the five-year rule applies. Because you can only make one rollover per year, be sure to combine all distributions into one rollover.
What about 2021? Do you have to take a double RMD? No. 2020 is considered a skip year, and there’s no requirement that you make up the distribution in a later year.
As you decide what to do, consider the following:
- Do you need the income this year?
- Will this affect your tax bracket?
- How will this affect your estate plan?
Penalty-Free Distributions from Retirement Accounts
The CARES Act allows for a penalty-free distribution of up to $100,000 from your retirement plan or IRA. In order to qualify, you must:
- Be diagnosed with coronavirus
- Have a spouse or dependent who is diagnosed with coronavirus
- Have an adverse financial consequence due to virus-related events (i.e., be quarantined, be furloughed or laid-off, have hours reduced, be unable to use childcare).
Keep in mind that these distributions are still taxable. However, the tax can be spread out over three years. For example, if you take a distribution of $75,000 to cover COVID-related expenses, you can spread the tax out until 2022, which may reduce the tax cost of the distribution. Or, you can elect to pay all the tax in 2020 if it is more advantageous. Alternatively, you can repay the distribution and avoid paying the income tax altogether. You can recontribute the amount in one or more payments. The once-per-year rollover limitation does not apply in this case.
Plan Loans from Employer Plans
The CARES Act increases the amount you can take as a plan loan from your 401(k). In prior years, you were able to take up to $50,000 or half the amount of your 401(k). In 2020, you can take a loan against your qualified plan up to $100,000 or the vested balance of the plan. In order to qualify, you must:
- Be diagnosed with coronavirus
- Have a spouse or dependent who is diagnosed with coronavirus
- Have an adverse financial consequence due to virus-related events (i.e., be quarantined, be furloughed or laid-off, have hours reduced, be unable to use childcare).
These loans are available until Sept. 22, 2020. Each plan has rules regarding these types of loans. Speak with your administrator to see if you qualify. If you already have a plan loan, you do not have to make any payments on that loan through Dec. 31, 2020.
If you find yourself in the position of needing access to retirement funds, we suggest speaking with your Certified Financial Planner Practitioner™ before taking action to ensure you’re making the best decision with the options available to you. You can reach us at www.WisdomWS.com.
More information can be found here, courtesy of Charles Schwab.
Andrea L. Blackwelder, CFP®, ChFC, CDFA® and Joseph D. Clemens, CFP®, EA are the founders and partners of Wisdom Wealth Strategies. Their shared passion is simple: to bring financial empowerment, understanding, and peace-of mind to people who wish to improve their financial future, build wealth for their families, and achieve financial independence. Click here to find out more about how you can work with the Denver Financial Advisors at Wisdom Wealth Strategies.