Your Questions Answered: How the CARES Act Changes RMDs

By far the questions I’ve been asked the most recently concern a major change that was made in required minimum distributions (RMDs) from retirement accounts.

The Coronavirus Aid, Relief, and Economic Stimulus (CARES) Act rolled through Congress in about a week and was signed by President Trump on March 27. The major focus of the law was to provide cash to businesses and individuals hurt by the pandemic. One way it did that was to suspend, or waive, all RMDs due in 2020. This is very similar to the provision enacted in 2009 during the financial crisis.

Under the CARES Act, the RMD rules don’t apply for calendar year 2020 to all defined contribution retirement plans, including IRAs. The suspension applies to 401(k)s, 403(b)s, SEP IRAs, SIMPLE IRAs, traditional IRAs and

Roth IRAs. A 457 plan sponsored by a non-government tax-exempt employer doesn’t qualify for the suspension of RMDs. Defined benefit pension plans don’t have RMDs, so they aren’t affected by the rule.

The suspension applies to accounts of both original owners and those who inherited accounts. In other words, both lifetime and post-death RMDs are suspended.

What if you turned age 70½ in 2019, though the final deadline for your first RMD was April 1, 2020? That first distribution is for the 2019 year, though the law lets you wait until the following April 1 to take the distribution.

The CARES Act has a special provision for this situation. The rule is that if you took that first RMD in 2019, there’s no change. You took the RMD, and it will be included in your gross income for 2019. But if the RMD wasn’t taken in 2019, the suspension applies. You don’t have to take the 2019 RMD, because you hadn’t taken it by the end of 2019. You also don’t have to take the 2020 RMD, because the law suspends all 2020 RMDs. So, because you had the foresight to delay the first RMD or simply procrastinated, your first two years of RMDs are suspended.

That’s a tough break for those who took their first RMDs in 2019 but who didn’t really need the RMDs. They can’t reverse the 2019 RMDs and must include them in gross income for 2019. Another complication is that the Setting Every Community Up for Retirement Enhancement (SECURE) Act enacted in December 2019 moved the first RMD date. If you turn age 70½ after 2019, you don’t have to take RMDs until April 1 of the year after you turn age 72. The RMD is for the year you turn 72 and can be taken during that year to meet the RMD requirement.

Someone in this situation isn’t affected by the CARES Act. If you turn 70½ after 2019, your first RMD is for the year you turn 72, which is after 2020. The suspension of RMDs in 2020 doesn’t apply to you.

Another question is: How are RMDs handled after 2020?

The answer is simple. You handle the 2021 RMD just as you would have before the CARES Act. The balance of your account at the end of 2020 will be used to determine the 2021 RMD. You’ll divide the December 31, 2020, account balance by the applicable factor from the life expectancy table issued by the IRS. The result is your RMD for 2021. You use the age that applies for you in 2021.

Keep in mind that the IRS issued proposed regulations in 2019 that would update life expectancy tables. The IRS expected to finalize those regulations during 2020. If it does, the updated life expectancy tables will be used for 2021 RMDs.

In other words, for the 2021 RMDs you don’t make any adjustments for the lack of RMDs in 2020. When we roll into 2021 (assuming Congress doesn’t change the rules again), the standard rules will apply. You’ll calculate the 2021 RMD just as though the 2020 RMD had occurred as usual.

The CARES Act also doesn’t affect any account for which you didn’t have to take an RMD in 2020 before the CARES Act.

Let’s say Max Profits turned 70½ in 2019. He has a traditional IRA, so he was required to take the first RMD for that by April 1, 2020. He didn’t take the RMD in 2019 and planned to

take it in 2020. Since 2020 RMDs are waived, Max doesn’t have to take that RMD. He’ll have to take the 2021 RMD by December 31, 2021, based on the December 31, 2020, value of the IRA.

Max still is working and also has a 401(k) account sponsored by his employer. Because he’s still employed by the sponsor of the 401(k) and isn’t a 5% or greater owner, Max has no RMD obligation in 2020 for the 401(k) and won’t have one until he stops working for the employer. The CARES Act doesn’t affect Max’s 401(k) RMD status.

Suppose an owner of an IRA failed to take an RMD for a year before 2020. The CARES Act doesn’t come into play. The RMD still is overdue and will remain overdue until it is taken. The CARES Act doesn’t allow a further delay in the distribution in pre-2020 RMDs. Any penalties and interest won’t be reduced.

The CARES Act has an interesting effect on some inherited IRAs.

Suppose Rosie Profits passed away in 2017 and didn’t name an individual beneficiary for her Roth IRA. Because the estate became the beneficiary, the entire Roth IRA had to be distributed within five years of Rosie’s death, or by December 31, 2022.

But the CARES Act extends the fiveyear period by one year. The five years are computed by skipping 2020. Rosie’s Roth IRA doesn’t have to be fully distributed until December 31, 2023.

It’s not clear from the wording of the CARES Act how the suspension would affect the five-year rule for someone who passes away in 2020 and doesn’t name a beneficiary. My reading of the rule is that there’s no change for someone who passes away in 2020. The IRA still will have to be distributed in five years, by December 31, 2025.

How does the CARES Act affect those who took all or part of their 2020 RMDs before the law took effect and who don’t want a distribution for the year?

In this situation, you might be able to take advantage of the 60-day rollover rule. When you take a distribution from an IRA or other qualified retirement plan, you can avoid including the distribution in gross income if within 60 days you return the distribution to the same account or deposit it in another qualified retirement plan.

In a normal year, an RMD can’t be rolled over to another plan or returned to the same account. But the CARES Act says that there are no RMDs for 2020.

So, even if you took an RMD early in the year before there was such a thing as the CARES Act, it now is not an RMD. It’s a regular distribution from the IRA (or other account) and is eligible to be rolled over to the same or another retirement plan.

To avoid taxes, the distribution has to be rolled over to a retirement account within 60 days of the initial distribution. Also, if you took a distribution of property, the same property has to be deposited in the retirement account to qualify as a roll-over. When cash was distributed, only cash can be rolled over.

The IRS apparently expanded the 60day rollover period for some taxpayers in Notice 2020-23, issued on April 9. The Notice said tax deadlines are extended to July 15, 2020, when the initial deadline fell between April 1 and July 14. The extension apparently applies to the 60-day rollover rule.

Unfortunately, the extension doesn’t apply to any distributions taken before Feb. 1. The 60-day deadline for those distributions was before April 1.

Keep in mind that the 60-day rollover isn’t available to beneficiaries of inherited IRAs. While the suspension of RMDs applies to them for 2020, they’re never eligible to do a rollover of a distribution, even a distribution that’s not an RMD. The IRS Notice doesn’t change that.

Another important restriction is that the 60-day rollover can be used only once per taxpayer every 12 months. Note that the restriction is per taxpayer, not per IRA or other retirement account. Also, the restriction is one rollover per 12 months, not per calendar year.

If you did a 60-day rollover in late 2019, you can’t do another until more than 12 months have passed. Also, if you have more than one IRA and took portions of the RMD from each IRA early in the year, you can’t return the distributions to the IRAs they were taken from. You can deposit them only in one IRA to keep with the rule of doing only one rollover per 12 months. (Actually, the rules aren’t crystal clear on this point. It might be considered multiple rollovers by the IRS since the distributions came from multiple IRAs, even if they were rolled over to only one IRA.)

The potential good news is that the one-per-12-month limit applies only to rollovers from IRAs to IRAs. If you still have a 401(k) account or other qualified retirement plan, you can roll over the IRA distribution to a 401(k).

Another option is to roll over the distribution to a Roth IRA. You’ll have to include the distribution in gross income and pay income taxes on it. But the money now is in a tax-free account where you can invest it.

Normally, you can’t do this. An RMD can’t be rolled over into a Roth IRA (or any other IRA). But a distribution that isn’t an RMD, which all distributions are in 2020, can be rolled over to the Roth IRA.

The CARES Act provides an IRA conversion opportunity to those who are in the RMD years.

Normally, if you’re subject to RMDs, you must take the year’s RMD from a traditional IRA before you can convert any amount to a Roth IRA. This rule deters many people who are older than age 70½ from converting any of their traditional IRAs to Roth IRAs. They don’t want to include an RMD in gross income and then also include a converted amount in gross income. The combination would push their tax brackets and tax bills too high.

In 2020, you can convert an IRA without first having to take an RMD. That rule, combined with the recent decline in the values of most IRAs, makes this an opportune time to convert a traditional IRA. You can make the conversion at a much lower cost than you could have last year.

Readers also are asking how the CARES Act affects qualified charitable distributions (QCDs).

To review, in a QCD, an individual who is age 70½ or older can have money transferred directly from an IRA to a public charity. The distribution isn’t included in gross income and counts toward the individual’s RMD for the year. Up to $100,000 annually per taxpayer can be treated as a QCD.

Though RMDs are suspended for 2020, the QCD rules remain fully in effect. You still can make a QCD in 2020.

While the QCD won’t count toward an RMD in 2020, it still has benefits. You’re reducing the value of the IRA, and that will reduce future RMDs. Also, the reduction in the IRA’s value is tax free. The QCD isn’t included in gross income, as in any other year.

Of course, you’re also benefitting the charity. The QCD still is the most tax-efficient way for most people over age 70½ to make charitable contributions.

Keep in mind that a QCD must be made to a public charity. Transfers to donor-advised funds or private foundations don’t qualify for QCDs. See more details about QCDs in our April 2019 issue.

The final question is whether you should you avoid an RMD in 2020 simply because Congress allows it.Maybe not. RMDs will be reinstated next year if the economy recovers, and you might want to get the money out of your IRA now. Deferring the RMD might only increase future RMDs and income taxes.

Try to anticipate your tax brackets. Some people will be in a lower tax bracket this year, because the bad markets and economy are reducing their incomes.

For them, this would be a good year to take the distributions any w ay. If you anticipate future tax rates to be higher because of legislation or changes in your income, consider taking the distribution in 2020.