RMD Relief Under CARES Act

The Coronavirus Aid, Relief, and Economic Security Act, or CARES Act, was signed into law on March 27, making it the largest fiscal stimulus bill ever passed in U.S. history.

Among other things, the Act affects retirement planning considerations, specifically regarding distributions from IRAs and employer-sponsored retirement plans.  Any investor who was otherwise required to take a required minimum distribution (RMD) this year can now forgo their 2020 RMD. This relief also applies to beneficiaries of inherited retirement accounts.

Foregoing a 2020 RMD allows tax-deferred dollars to remain in an investor’s retirement account. This will provide a potentially significant tax break to some investors, as they can avoid paying federal or state income tax on those dollars on their 2020 tax returns.  

Additionally, RMDs are calculated using the value of the retirement account on December 31 of the prior year. Your December 31, 2019 account value would probably have been much higher than exists today because it was prior to the COVID-19 pandemic, which has ravaged the world economy.

If you have money directly deposited into your bank account from your IRA each month, consider stopping the automatic deposit unless the money is needed for cash flow. If you need the money from your IRA for cash-flow purposes, consider if it is possible for you to take the money from a taxable account instead.

If you already have taken your 2020 RMD and it is within 60 days of the distribution, you may be able to roll the money back into your retirement plan. However, please note you cannot take advantage of this option if you completed another 60-day rollover within the past 365 days. Please consult with your tax and financial advisors.

If you took your RMD very early in 2020 and have passed the 60-day window, you may have another option. A rollover can be completed any time over the next three years if it can be shown that you were impacted by the COVID-19 crisis as stated by the CARES Act guidelines. (See criteria below).

Typically for those still working, in-service distributions are restricted to certain hardships like death or disability. The CARES Act permits plan sponsors to allow working participants to access their 401(k) (or other employer-sponsored retirement plan) if they are adversely affected by COVID-19. 

Coronavirus-related distributions give you the ability to access up to $100,000 from your retirement plans if you were affected by COVID-19 in one of the following ways:

• You were diagnosed with COVID-19.
• Your spouse or dependent was diagnosed with COVID-19.
• You had adverse financial consequences as a result of being quarantined, furloughed or laid off, or had reduced work hours as a result of COVID-19.
• You were unable to work due to lack of child care availability.
• Your business hours of operation decreased.

The potential tax benefits from distributions based on the above guidelines include being exempt from the 10% early withdrawal penalty if you are younger than 59½ and the suspension of mandatory withholdings from employer-sponsored retirement plans.  Additionally, the distribution will be taxed ratably over a three-year period, instead of fully in the year of distribution (but you may elect to pay it all at once, if you prefer).

Lastly, if you recover financially, you can repay the funds to the plan within three years without being subject to the annual maximum contribution amounts because your repayments will be treated like a rollover. If you elect to repay the funds to the plan within three years, the taxable amount of the distribution will be reduced.

With all the uncertainty affecting so many parts of everyday life as a result of COVID-19, the CARES Act gives investors an opportunity to make smart planning decisions that may lower or defer tax liability.

As always, consult your tax professional. The views or opinions in this article are those of the author and do not necessarily represent the views of Washington Trust Bank or senior management. Washington Trust Bank believes that the information used in this blog was obtained from reliable sources, but we do not guarantee its accuracy. Neither the information nor any opinions expressed constitutes a solicitation for business or a recommendation of the purchase or sale of securities or commodities.

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