Posted by Carmen Garcia

Some important Update about the Required Minimum Distributions

Some important Update about the Required Minimum Distributions

The CARES Act recently passed into law some measures to stimulate the economy. There is a provision that allows retirees to stop taking Required Minimum Distributions (RMD) from 401(k) types plans or IRA this year.

RMD values are based on the account value at the end of the previous year. Since most accounts dropped dramatically in 2020, the required withdrawal amount would have been a much higher percentage of a retiree's account. The new law allows retirees to keep this money in their accounts, being able to recover part of the market losses when the economy recovers.

Here are some common questions retirees ask about the changes on RMD:

    •    Are defined benefit plans (such as pensions) also included in the RMD exemption? No, defined benefit plans are not included, so if you want to receive distributions from a defined benefit (DB) plan, you must continue to do so.

    •    Does the exemption apply to Inherited IRAs? Yes. The exemption extends to inherited IRAs, including stretch IRAs. It appears that IRAs inherited from non-marital beneficiaries, which would normally be settled within five years of the death of the original account holder, should not make a distribution in 2020. You should consult your tax advisor; however, beneficiaries have an additional year to meet the five-year requirements, since RMDs can be excluded in 2020.

    •    Expect more details from the IRS soon:  The IRS will issue additional guidelines in the coming days or weeks to deal with other situations and problems that have arisen as a result of the CARES Acts.

    •    How old do I have to be to qualify for the exemption? If you are subject to RMD, the exemption applies to you, regardless of your age. Includes original account holders over 70 or 72 under the SECURE act, original account holders who turned 70 in 2019 but have not yet been distributed and who have inherited IRA recipients of any age.

    •    If I already had an RMD in 2020, can I reverse it? Technically, the distribution cannot be reversed. However, according to the CARES Act's current update, if the distribution has been made in the past 60 days, we believe that you can return the amount to your retirement account, assuming the distribution is suitable for reinvestment. But, it does not include most inherited retirement accounts. Unfortunately, it is not possible to reverse the withholding tax. Still, depending on other factors in your tax situation, the IRS may be able to refund the withdrawal when the return is registered in 2020.

    •    If I have an inherited IRA and took an RMD by 2020, can I still contribute to the distribution? Distributions inherited from the IRA are generally not eligible for a rollover; therefore, assuming that the IRS does not provide additional instructions, distributions that have already been taken cannot be returned. However, it is possible for a coronavirus recipient to view the amount as a distribution related to the amount of coronavirus and the new contribution.

    •    Should retirees withdraw RMD from their retirement accounts in 2020? No, all RMDs have been suspended by 2020. This exemption includes pension accounts subject to RMD, such as IRA, 401 (k), Roth 401 (k), and legacy accounts.

    •    Under Internal Revenue Code 72 (t), I receive "substantially equal periodic payments" without penalties from my retirement account. Does the RMD exemption apply to me? No, the exemption does not seem to cover this type of distribution. A substantially equal periodic payment is not the same as an RMD, which means that you will have to continue receiving these distributions.

    •    What happens if I took my 2020 RMD more than 60 days ago? You can still contribute to the distribution if you can demonstrate an impact of the coronavirus, as defined in section 2202 of the CARES act. In general, this is an "impact" if you, your spouse, or a member of your household have contracted the virus or if the virus has affected you financially – such as being dismissed or the inability to work. These can count the distribution as coronavirus-related and re-contribute to the amount over the next three years

In the meantime, think about these questions and respond to a first interpretation of the new law, not too personalized tax advice. To do this, you need to speak to a CPA or a tax specialist who knows your particular situation.

Carmen Garcia
Contact Member