There is some relief for retirees and retirement plan participants in the form of new provisions in the ~$2 trillion Coronavirus Relief bill (CARES Act) that was signed into law on Friday, 3/27/2020. The specific provisions of the bill affecting IRAs and retirement plans are outlined below. After reviewing these changes, we will address client situations best suited to take advantage of the new Act, and what procedures we are recommending to allow us to efficiently assist you. Implementing changes to your required minimum distribution (RMD) strategy for 2020, if applicable, may significantly reduce your 2020 income tax bill, as well as reduce equity fund distributions at relative market lows; therefore, allowing those shares more time to recover in price before liquidating.
Important Care Act Provisions
-Retirees who would normally be required to take required minimum distributions (RMDs) in 2020 can suspend/waive RMDs until 2021. If you turned 70 ½ in 2019 and elected to deferred your first RMD payment until the April 1st 2020 deadline (normally requiring a “double distribution” by 12/31/2020), you could waive both your 2019 and 2020 RMDs.
-For clients who have already taken RMDs in 2020 (either lump sum or in systematic monthly or quarterly payments), there may be advantages in “reversing” those distributions under the existing 60 day rollover/transfer rule as long as the following three provisions are met:
1) 60-day Rule – Funds must be rolled back into an IRA or retirement plan within 60 days of the receipt of those funds to eliminate the distributed amount from taxable income for the year.
2) Since RMDs are not technically eligible for a rollover (which falls under the provision indicated above), further IRS rulings are expected to clarify that since 2020 RMDs are waived, 2020 RMDs to date do not actually qualify as RMDs any longer, and therefore, can be rolled back within the 60 day period. However, if appropriate, we recommend not waiting for this clarification before you rollback the 2020 RMDs already taken given the 60 day rule indicated above. We can always “re-distribute” that money before year-end if IRS clarification is not favorable.
3) Only one 60 day tax-free transfer is allowed per year. If you have already taken advantage of the 60 day rollover rule in 2020, you will not be able to also roll back year-to-date 2020 RMDs.
-The IRA and Roth IRA contribution deadline for 2019 has been extended to match the new 2020 tax filing deadline of July 15, 2020 providing extra time to take advantage of 2019 deductions. This extension also applies to Health Savings Accounts (HSAs), Archer Medical Savings accounts and Coverdell Education Savings accounts.
-This year, you will be able to take penalty-free, pre-59 ½ IRA and retirement plan distributions of up to $100,000. Although the 10% penalty is eliminated, income taxes will still be due on distributed funds; however, that income tax liability can be spread over a three year period.
-The borrowing limit for retirement plan loans (not applicable to IRAs) is increased to $100,000 up to 100% of your retirement plan balance whichever is less, up from the current $50,000 up to 50% of the retirement plan balance (reduced by other outstanding loans). This rule applies to loans taken within 180 days of the bill’s enactment, 3/27/2020. Additionally, any loan repayments normally due between 3/27/2020 and 12/31/2020 can be suspended for one year.
Given that the first two provisions (RMD waiver and reversing RMDs already taken in 2020) may significantly affect many of our clients, the remaining focus of today’s blog will address these particular issues and how you might be able to take advantage of these changes if applicable to your specific situation. However, if you have any questions regarding the other provisions in the bill, please do not hesitate reaching out.
What Should I Do?
Clearly, if you do not have excess cash reserves in the bank (or under the mattress!), or in other after-tax (NQ/non-qualified) accounts, and your RMDs represent income that you need to spend this year, there are no further planning issues to consider (other than adjusting the distribution funding source that was addressed in our previous email this past week). You will not hear from us regarding any changes to your current RMD strategy.
However, if you do have after-tax sources that can be used to address your spending need this year in lieu of IRA distributions (excess cash, fixed annuities or after-tax bond or stock funds), you should seriously consider taking advantage of one or both of the first two provisions highlighted in bold above. Keep reading!
Due to the heightened activity at HDR created by the virus scare, subsequent market volatility and “work from home” requirements, coupled with the fact that we cannot speak to all clients at once, we would like to implement our own “triage” to address client RMD strategy changes. We will be looking to address changes with clients in the following order:
- Clients who have already taken sizeable lump sum RMDs in 2020 and still can reasonably roll back those funds within 60 days of receiving those funds. Time may be of the essence as we cannot rollback funds received prior to 60 days of the implemented roll back.
- Clients with less significant distributions already taken in 2020 where tax implications of the roll back will be less impactful.
- Clients with RMDs scheduled to go out within the next 30 days
- Clients with lump sum RMDs scheduled to go out later in the year.
Volatile financial markets and further declines are likely before things improve. We will continue to do our best to help you through this difficult period. Your patience is appreciated.
Your HDR Team