Due to the coronavirus pandemic, a number of new IRS rules have been made. What will follow is part 3 of a 3 part discussion of changes to IRS code from the Cares Act. The work was done by Charles Rotblut CFA of the American Association of Individual Investors (AAII). It is broken into 3 parts. Who can read that much tax code all at once? It is important even if the subject matter isn’t exciting.
New Rules for RMD’s
A combination of actions effect required minimum distributions (RMD’s). The impact on any particular individual depends on their age and wealth. This section is one of the largest sections of new IRS rules.
RMD’s have been waived for 2020. No RMD’s have to be taken from a traditional IRA, 401(k), Roth 401(k), SEP IRA or similar type of account. Roth IRA’s were previously and will continue to be exempt from the required distribution rules. The IRS has yet to address the treatment of inherited IRA’s. This too may change. It is prudent to watch for official guidance from the IRS.
If you already took an RMD this year and want to avoid paying taxes on it, you have 60 days to roll it over to a new IRA. In doing so, understand that only one rollover per 12-month period is allowed. In cases where taxes were withheld from the distribution being rolled over, the IRS requires taxpayers to “use other funds to make up for the amount withheld.”
If more than 60 days have passed, you will owe taxes on the distribution from non-Roth retirement accounts. According to Fidelity, the IRS has since clarified that the extension on tax deadlines applies to rollover contributions for which, as Fidelity explains, “the 60-day deadline fell between April 1 and July 14. Individual investors can make an eligible rollover contribution on or before July 15, 2020.”
Effects of actions taken
RMD’s for 2021 will be determined by the balance of an eligible account e.g., traditional IRAs, 401(k)s, etc. at the end of 2020 and your age. To the extent that money is not withdrawn from your tax-deferred retirement accounts this year, the dollar amount for determining your 2021 RMD will increase. Fluctuations in the value of your investments will also have an impact on your account balance.
Also impacting your RMDs for 2021 and beyond will be revised life expectancy tables. The proposed tables released in late 2019 assumed a 29.1-year life expectancy for a 70-year-old IRA owner versus the previous expectancy of 27.4 years. Additionally, the proposed uniform life table will be extended to 120 years, up from the current table’s 115 years. Combined, the proposed changes would lead to a 70-year-old retiree’s RMD decreasing from 3.65% of their retirement account’s balance to 3.44% of the account’s balance. These numbers may change once the 2021 tables are released.
You could use the tax savings from not taking an RMD this year and use it to cover the tax cost of doing a Roth IRA conversion if you won’t need the funds for five years. Doing so would lower your RMDs for next year. There is a “Roth Versus Traditional IRA” InvestoGraphic published in the December 2019 AAII Journal. It may help you decide whether doing Roth IRA conversion makes sense.
The SECURE Act of 2019 raised the starting age for RMD’s to 72 from 70½.
The change in age applies to those who turned 70½ on or after January 1, 2020. Those who turned/will turn 70½ in 2020 or later have until April 1 following the year in which they turned 72 to take their first RMD. If you turned 70½ in 2019, you were required to take a distribution by April 1, 2020. Due to the coronavirus, you are not required to take a second RMD for the 2020 tax year.
A new 10-year limit on withdrawals for inherited IRAs was instituted by the SECURE Act. IRAs inherited on or after January 1, 2020, must be liquidated by the end of the 10th calendar year following the account owner’s year of death. This provision eliminates stretch IRAs, which previously allowed heirs to stretch withdrawals over the course of their lifetime. For IRAs inherited this calendar year, 2021 counts as year 1 of the 10-year maximum period for taking withdrawals. Due to the coronavirus pandemic, a number of new IRS rules have been made.