Waiver on Required Minimum Distributions for 2020
Taxed-deferred retirement plans are a great way to save. However, the government must wait until a person retires before they can begin taxing the money invested in them (along with any gains generated). To avoid waiting forever, Congress stepped in and mandated required minimum distributions (RMDs).
The RMD is the amount that a person with a retirement plan must take every year after turning 70 ½ on a qualified 401(k), 403(b), SEP-IRA, and traditional IRA. If a person does not take the RMD, then they could pay a 50% excise tax on the amount that should have been distributed, along with other taxes.
With the recent economic downturn, most retirement account balances have nosedived. Fortunately, the government has waived the required minimum distribution for this year, but many investors might be unaware of that fact.
CARES Act to the Rescue
An investor’s RMD is based on the account’s value at the end of the prior year. For 2020, this means that the RMD would have been calculated based on the value at the end of 2019—and several months before the economy went haywire. Consequently, many people would be stuck paying large RMDs on accounts that have shrunk dramatically the past few months.
Congress recognized the unfairness this posed, so the CARES Act waived the RMD requirement for 401(k)s and non-Roth IRAS for 2020. Accordingly, you do not need to take the RMD, which can help a retiree maintain more income in their account. The waiver also applies to those who have inherited a retirement account.
Should You Still Take a Withdrawal?
One advantage of forgoing a withdrawal is that more money remains in the account to grow tax-deferred. The stock market is beginning to bounce back from its lows in April, and future gains are widely expected.
Nevertheless, there are a couple reasons to take a withdrawal even if one is not required. For example, some people need the money to help support themselves, so taking a withdrawal is a necessity. Someone might also take a withdrawal if they expect to be in a higher tax bracket in 2021. By taking a withdrawal this year, a person can pay less in taxes on the amount that they pocket.
Returning the Withdrawal
Those who already took their RMD for 2020 might be able to return it. Under the CARES Act, any withdrawal will be considered a voluntary distribution, so it should be eligible to be deposited back into its account or rolled over into a new one.
You must do so within 60 days of taking the distribution. The IRS waived the 60-day requirement for some rollovers, but that deadline passed in mid-July. Remember, you can only rollover one distribution each year.
Elder Law Advice and Planning
Millhorn Elder Law Planning Group has assisted those in The Villages for years establish estate plans and tackle other legal issues as they arise. For assistance with any legal issue you have, please contact our estate planning attorneys to schedule a free consultation by calling 800-743-9732.