Are you freaking out because you have to take a tax-mandated withdrawal from a retirement account on April 1? The Coronavirus Aid, Relief and Economic Security (CARES) Act has some good news for you.
The new law that's gotten a lot of attention for the pandemic related stimulus checks that should be going out soon also offers a break to seniors who must take required minimum distributions, or RMDs.
RMDs are waived for 2020 under the CARES Act. That means you can leave your money in your tax-deferred account this year or at least not take as much out as Uncle Sam demands. That should help as your market-battered nest egg looks to rebound..
Most immediately, this one-year RMD reprieve applies to folks who turned 70½ last year and pushed their first RMD until tomorrow's April 1 grace period deadline.
But the no-RMD option for 2020 also is available to older retirement plan owners who for years have been taking RMDs and were planning to do so again at some point this year. The one-year RMD waiver also applies to folks who inherited IRAs.
Affected retirement accounts: RMDs are, as the name says, required amounts that you must withdraw from a retirement plan that's been earning money over the years.
The accounts subject to the RMD rules include traditional IRA, SIMPLE IRA, SEP IRA or a workplace retirement plan such as a 401(k).
The reason for the forced withdrawal? Uncle Sam will only wait so long before demanding you take some cash from these tax-deferred plans and pay him his portion at regular income tax rates.
New withdrawal age rules: RMDs used to kick in when you turned 70½. That age was changed to 72 under the Setting Every Community Up for Retirement Enhancement Act of 2019, or SECURE Act, which took effect this year.
However, folks who turned 70½ in 2019 and didn't take their first RMD that year still face their initial required retirement plan withdrawal by April 1. Others who also were facing a 2020 RMD would have had to take the money out by the end of this year.
The CARES Act, signed into law on March 27, says that individuals "who would otherwise be required to withdraw funds from such retirement accounts" don't have to do so this year because of economic slowdown caused by the COVID-19 pandemic.
That's especially welcome news for folks facing both your 2019 and 2020 RMDs. They're now off the tax hook for both RMDs.
What if you already took your first RMD under the prior age guidelines last year? Sorry, any part of your RMD taken in 2019 cannot be undone.
Same old withdrawal process: While the RMD age has changed, the general withdrawal process remains the same.
The amount you must cash out is based on your life expectancy and the value of your account.
The Internal Revenue Service provides the life expectancy factor in several tables it published each year in Publication 590-B, Distributions from Individual Retirement Arrangements (IRAs). The one used by most is t the Uniform Lifetime Table, which I recreated it in this blog post.
That life figure then is used to divide the value of your retirement plan(s) to reach the amount to withdraw.
And that value is what your plan is worth on Dec. 31 of the prior year.
Relief from probable account losses: This year, most retirement plans (and other assets) were worth much more at the end of 2019 than they are now.
The dramatic market decline would have meant folks forced to take an RMD likely would have faced a big tax bill on a retirement account now worth a whole lot less. The CARES Act 2020 RMD waiver removes that unfortunate tax possibility.
Such a breather is not new. Similar relief was granted for RMDs back in 2009 during the Great Recession caused by ill-advised subprime mortgages that led to a housing market crash.
This time, a global health scare has prompted the RMD relief.
"So, it's good Congress gave us all a year off to sit this out and see what happens, and hopefully have more time to recover losses," said CPA and retirement plan expert Ed Slott in a recent AARP article.
If you were facing an April 1 RMD, you should have gotten a notice about this one-time reprieve from your retirement plan's manger. If not, you should touch base with him or her to make sure that everyone is on the tax page as far as the new COVID-19 relief law.
And enjoy not having to spend your nest egg just because the tax code says so.
|Coronavirus Caveat & More Information
In 2020, we're all dealing with extraordinary circumstances,
both in our daily lives and when it comes to our taxes.
The COVID-19 pandemic and efforts to reduce its transmission
and protect ourselves and our families means that,
for the most part, we're focusing on just getting through these trying days.
But life as we knew it before the coronavirus will return,
along with our mundane tax matters.
Here's hoping that happens soon!
In the meantime, you can find more on the virus and its effects on our taxes
by clicking Coronavirus (COVID-19) and Taxes.
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