Do You Have to Take an RMD from Your IRA in 2020?
Peacock & French CPAs
Oct 01, 2020
The COVID-19 pandemic and the subsequent Coronavirus Aid, Relief, and Economic Security (CARES) Act have impacted the taxes, income, and retirement plans of American citizens in countless ways. Many individuals have seen a dramatic drop in the value of their investments, including their IRAs and other retirement accounts. In response to this, the CARES Act included a provision that allows retirees to skip their required minimum distribution (RMD) for 2020. Keep reading to learn more about this waiver and how it applies to you.
The COVID-19 pandemic and the subsequent Coronavirus Aid, Relief, and Economic Security (CARES) Act have impacted the taxes, income, and retirement plans of American citizens in countless ways. Many individuals have seen a dramatic drop in the value of their investments, including their IRAs and other retirement accounts. In response to this, the CARES Act included a provision that allows retirees to skip their required minimum distribution (RMD) for 2020. Keep reading to learn more about this waiver and how it applies to you.
Why the Waiver?
First, you may be wondering why this waiver is being offered in the first place. As mentioned above, the negative toll of the pandemic on our economy has caused many retirees to lose a great deal of money in their invested retirement accounts. Thus, the usual RMD would represent a much larger percentage of these funds than normal. The waiver of the RMD is being offered so that retirees have the option to leave the funds in the account and hopefully recoup some of those market losses when the economy rebounds.
Which Accounts Qualify?
All RMDs have been suspended for 2020. This applies to any and all accounts that are usually subject to RMDs, including IRAs, 401(k)s, Roth 401(k)s, and inherited accounts.
For inherited accounts, which typically must be liquidated within 5 years of the original account holder’s death, the waiver gives the beneficiary an extra year to fully liquidate the account, since the RMD can be skipped for 2020. We recommend consulting with a CPA regarding inherited accounts, as this is an interpretation of the legal language included in the waiver, and a CPA will be able to offer more tailored advice for your individual situation.
Please note that the waiver does not apply to defined benefits (DB) plans. So, if you’re taking distributions from a defined benefits plan, you will still need to take one for this year.
Is There an Age Limit?
No matter what your age, if you are subject to RMDs, then the waiver would apply to your accounts. This includes those who are over 70 ½ (or over 72, under the SECURE Act), as well as younger holders of inherited accounts.
What If I Already Took My RMD?
If you already took your RMD, it is unfortunately too late to reverse that distribution. The IRS did offer a window in which these individuals (including holders of inherited accounts) could re-contribute their distribution amount back to their retirement accounts, but that window closed on August 31st. The new rule even allowed individuals to re-contribute multiple distributions for the year, if more than one was taken in 2020. But again, this option is no longer available. If you took an RMD and did not re-contribute it before the end of August, you will have to keep those funds as you normally would with your annual distributions.
Will the Re-Contributed Amount Be Taxed?
If you did take a distribution, but re-contributed the full amount before August 31st, you might be wondering how this will impact your taxes. Unfortunately, you can’t reverse the tax withholdings on your distribution. However, depending on your specific tax situation, the IRS may refund the amount withheld when you file your tax return for 2020. Consult with one of our tax professionals to find out if this could apply to you, or how your re-contribution may otherwise impact your taxes.
What about Substantially Equal Periodic Payments?
Substantially equal periodic payments (SEPPs) are a method of distributing funds from an IRA or other qualified retirement plan before the age of 59 ½ without incurring IRA penalties for early withdrawals. If you’re receiving SEPPs, the RMD waiver does not apply to you. These payments are defined differently than the usual RMDs, so you will need to continue taking your SEPPs as usual this year.
Understanding RMDs and Your Taxes
The CARES Act has altered far more than RMDs for 2020, and there’s a great deal of confusion regarding these changes and how they’ll impact your retirement plans and your upcoming tax return. If you’re uncertain about any of these subjects and need assistance, please reach out to us here at Peacock & French. We’ll gladly sit down with you and go over your retirement accounts—whether you’ve taken an RMD, are taking the waiver, or re-contributed your RMD—and discuss how these items will impact your tax return.
Our professional tax preparers and financial advisors have helped dozens of retirees to better understand their finances and take control of their retirement. We can help you to do the same. Give us a call to schedule your appointment today.