What is The CARES Act?

The CARES Act, signed into law on Friday, March 27, is a relief bill for individuals, small businesses, and non-profit organizations, whereby the government gives up current tax revenue to provide financial relief for individuals. Much of the talk surrounding the CARES Act centered on the immediate economic stimuli, such as the stimulus checks, the expansion of unemployment benefits, and the Paycheck Protection Program for small businesses and non-profits. But there was one significant change for 2020 that will benefit retirees required to take minimum distributions from individual retirement accounts or inherited retirement accounts.

What is a Required Minimum Distribution (RMD)?

A required minimum distribution (RMD) is defined as the current amount of money required to be withdrawn by the account owner of a traditional retirement account once they have reached age 72 (it was 70 ½ until January 1, 2020). Examples of traditional retirement accounts requiring a minimum distribution are IRA, SEP-IRA, 401(k), 403(b), and 457 plans. The distribution amount is included in the account owner’s taxable income in the year of distribution, increasing the income tax in that year. The CARES Act waives the minimum distribution requirement for 2020.

Also included under the definition of retirement accounts for which the waiver applies are required minimum distributions from inherited IRAs. If you are the beneficiary of an IRA from a deceased relative or friend, you would be required to start taking minimum distributions the year after the account owner’s year of death. These minimum distributions are also waived for 2020.

The waiving of RMDs provision is beneficial in several ways. First, it allows you to save taxes by not having to take the distribution in the first place. Thus, the distribution is never added to your income tax return. Second, it allows you to avoid selling investments in your portfolio to fund the distribution, which would be necessary because distributions from a retirement account must be made in cash. By not having to sell investments during the temporary market correction, that investment can take the time necessary to recover most, if not all, of its value.

Most people required to take minimum distributions can do so over their life expectancies. However, certain people who inherit a retirement account are required to withdraw the entire account balance by the end of the fifth year following the date of death of the original account owner. For those people, the CARES Act allows them to not count 2020 as one of the five years.

What if You Already Took Your Required Minimum Distribution for 2020?

If you took your RMD before the enactment of the CARES Act, there are a couple of options that may be available to you.

If you took your Required Minimum Distribution within the last 60 days

If you took your RMD within the last 60 days, you might be able to roll the distribution back into your retirement account. To avoid these distributions from being taxable, the full amount of the distribution (including the income taxes withheld) must be deposited back into the retirement account within 60 days of the initial distribution. Then the distribution is considered a rollover and is not taxable. If you are unable to roll the full amount back, then you would still pay tax on the portion of the distribution that was not rolled back. The 60-day rollover can only be done one time every twelve months, so if you have already utilized this strategy, you may not be able to do so again.

If you took your Required Minimum Distribution more than 60 days ago

If you are past the 60-day limitation, you may be able to designate your distribution as a Coronavirus-Related Distribution (CRD). To qualify as a Coronavirus-Related Distribution, the distribution, not to exceed $100,000 in aggregate, must have been made between January 1 and December 31, 2020, by a person affected in the following manner:

  1. You or your spouse (or a dependent) have been diagnosed with COVID-19; or
  2. You have experienced adverse financial consequences as a result of:
    • Being quarantined, furloughed, laid off, or having work hours reduced due to COVID-19;
    • You are unable to work due to lack of childcare due to COVID-19;
    • You own or operate a business that has been forced to close or reduce hours due to COVID-19; or
    • Other factors as determined by the Secretary of the Treasury.

If the distribution qualifies as a CRD, you can repay the distribution by depositing it back into a retirement plan within three years, beginning on the day after the date of the distribution. Any amount of the CRD repaid within that time frame is not taxable.

By design, these rules are quite broad, so many individuals will likely be able to take advantage of this provision. If you have already taken a Required Minimum Distribution from an IRA in 2020, we recommend contacting your advisor to determine whether you should take advantage of one of these benefits.

For more information about the CARES Act, read The CARES Act and You, published on March 31.