For 2020, the rules governing required minimum distributions (“RMDs”) from retirement plans and early withdrawals of retirement plan funds have changed. Please take time to read this summary of important changes especially if they apply to you or someone in your family.
On January 1, 2020, the following changes became effective under the SECURE Act.
* RMD Age Raised to 72. The SECURE Act raises the age for beginning required minimum distributions to 72 for all retirement accounts subject to RMDs. The new rule is good news for IRA owners reaching age 70 ½ in 2020 who do not have to take their first RMD in 2020 now that the RMD deadline has been extended to age 72.
* Good Bye, Stretch IRA”. Beginning for deaths after December 31, 2019, the stretch IRA for inherited retirement accounts is replaced with a ten year rule for the vast majority of beneficiaries. The rule requires accounts to be emptied by the end of the tenth year following the year of death. There are no annual RMDs. Instead, the only RMD on an inherited IRA is the balance at the end of the 10 years after death. For deaths in 2019 or prior years, the old rules remain in place. There are five classes of “eligible designated beneficiaries” who are exempt from the 10-year post-death payout rule and can still “stretch” RMDs over life expectancy. These include surviving spouses, minor children, disabled individuals, the chronically ill, and beneficiaries not more than ten years younger than the IRA owner.
Less than 3 months later, on March 27, 2020, the following changes became effective under the CARES Act.
* 2020 RMD distributions are suspended. The suspension applies to plan participants and also to beneficiaries. Participants who already withdrew some or all of their 2020 RMD may re-contribute the distribution to their retirement account; the ability to re-contribute does NOT apply to beneficiaries.
* No 10% penalty on early distributions from an IRA or qualified plan under certain circumstances and no 20% withholding required for Federal taxes (but the taxes are still owed and payable over a 3-year period). For 2020 only, the 10% early withdrawal penalty from retirement plans does not apply to a “coronavirus-related distribution”. Additionally, you do not have to withhold 20% for Federal taxes from the money withdrawn. Here are the rules for withdrawal and re-payment. There is a $100,000 limit for the early distribution when a taxpayer/spouse/dependent suffers adverse financial consequences from 1) being quarantined, furloughed, laid off or unable to work OR 2) closing or reducing the hours of a business because of the virus. Taxes are still owed on the amount withdrawn, payable over a 3-year period (usually taxes are due in the same year as the withdrawal).
Consider your options and plan carefully.
From a planning perspective, the decision to take or not to take a non-required RMD in 2020 is different for each individual. If you need or count on RMD for annual income, then that will be a reason to take some or all of your RMD in 2020. Whether or not you need RM income, it may be a good time to consider rolling over some of your retirement funds to a ROTH IRA. As for early withdrawals from a retirement plan, those should only be taken as a last resort.
As always, we are available to discuss your specific financial concerns regarding retirement accounts, RMDs and Roth conversions. We look forward to hearing from you; 214.727.6000; firstname.lastname@example.org.