By – Stephen J. Fauer, CFA
Your required minimum distribution (RMD) is the minimum amount you must withdraw from your IRA, SEP IRA, SIMPLE IRA, or retirement plan such as 401(k), 403(b), 457(b), profit sharing plans, or other defined contribution plan. The rules became more confusing as a result of changes that came with the passing of the SECURE Act in December 2019. Then RMD requirements were suspended for 2020 by the CARES Act which was signed into law on March 27th. Given that most don’t have to take RMDs in 2020, why even write about it? We do so to help eliminate confusion and because there are certain nuances that may impact you immediately.
The first clarification involves those who have reached 70 ½ or inherited an IRA in 2019. Normally those individuals would have had to take one distribution by April 1 for the 2019 tax year and one by December 31 for the 2020 tax year. The suspension applies to both of those withdrawals. Though not covered here, going forward there are new rules defining the age at which you must take an RMD and the period in which you must distribute an inherited IRA.
If you have reached age 59 ½ withdrawals have generally been subject to a 10% penalty. That penalty has been suspended in 2020 for withdrawals up to $100,000. The limitation is that the withdrawal must be for coronavirus-related purposes, including if either you or your spouse is diagnosed with the virus, if you have negative financial consequences due to being quarantined, furloughed, or laid off, or if you have housing issues, childcare issues, or other related issues. As you can see, those limitations aren’t overly restrictive. Withdrawals will still be taxed, but the tax will be waived if you return the funds within three years. If you do have to pay the tax, you can spread that tax bill over three years starting with your 2020 tax return.
What if you already took your RMD in 2020 before the RMD requirements were suspended? Of course you can keep the money and pay the tax. Normally you cannot rollover a distribution, but this year you can with one important caveat. It must be rolled over within 60 days of the distribution. What if it has been more than 60 days since you made the distribution? For now, there is nothing you can do. However, in 2009 when there was a suspension, the IRS did grant a blanket extension for the rollover deadline. Perhaps they will do so again this year. We will have to wait and see.
We’ll explore one more situation. Suppose you need or want the distribution, but you don’t want to pay the tax. One option is to not take the RMD and borrow money from your 401(k) plan if you have one and if the plan allows it. The CARES Act raised the maximum amount you can borrow from a 401(k) from 50% of your vested balance to 100% and raised the maximum borrowing from $50,000 to $100,000 for 180 days after the law was enacted. Do keep in mind that these loans must be paid back and come with interest and fees.
We’ll close with some important warnings. Please seek out a tax advisor to clarify your own situation. We cannot anticipate every situation and every nuance as it applies in all cases. Second, we talked about strategies with respect to this year’s rules, but don’t let those strategies be your only (or primary) guide. By all means, if you need to money, take your distribution. But don’t take money such as loans or excess distributions just because you can. There are potential consequences and risks associated with such decisions including reducing the amount available to yourself over the rest of your retirement. Please stay healthy and safe, and don’t forget your long-term goals.