Veronique Horne, J.D. and Kevin Wong, CPA
8.20.20 | Wealth of Insights
This past year has brought changes to retirement plan benefits. At the end of 2019, the Setting Every Community Up for Retirement Enhancement (SECURE) Act was enacted. On March 27, 2020, the Coronavirus Aid, Relief, and Economic Stimulus (CARES) Act was passed. Both Acts impact estate and income tax planning as it relates to retirement plan benefits. This article will discuss the key provisions of these Acts that may impact retirement account owners and beneficiaries.
Required Minimum Distribution (RMD) Age and Contribution Changes
The SECURE Act responded to the ongoing trend that taxpayers are retiring at an older age and living longer. Starting on January 1, 2020, the SECURE Act increased the age for RMDs from 70½ to 72. The Act also allows those taxpayers that continue to receive compensation after attaining their RMD age to continue to make contributions to traditional IRAs. Both changes provide taxpayers with additional time to grow tax-deferred retirement funds.
Prior to 2020, beneficiaries of non-spousal inherited IRAs, regardless of what type of IRA, were required to take RMDs based on their life expectancy. As a result, the younger the beneficiary the lower the RMD, allowing the undistributed funds to grow tax-deferred over an extended period. A younger beneficiary could benefit by stretching the RMDs over their lifetime.
Starting in 2020, for inherited IRAs in which the original account holder died in 2020, the stretch IRA strategy is no longer available. The Act requires the entire inherited IRA to be distributed within 10 years of the owner’s death. Beneficiaries are now presented with immediate income tax planning opportunities to maximize after tax distributions. The timing of when to distribute the assets within the 10-year period depends on an individual’s facts and circumstances.
For a more in-depth discussion on how the SECURE Act impacted estate planning for retirement plan benefits click here.
CARES Act – Waiver of the RMD
The Coronavirus pandemic caused a market downturn which significantly reduced retirement account balances. To mitigate the diminution of value, the CARES Act provides for a waiver of RMDs for 2020. The waiver includes RMDs from a defined-contribution plan, including a 401(k) or 403(b) plan, or an IRA. It is also important to note that the waiver does not apply to defined-benefit plans. Here are some of the specific and frequently asked questions for which the Berdon team has been providing guidance:
What if I received my RMD prior to the CARES Act?
Many taxpayers received their RMD prior to the passing of the CARES Act. The Act provides individuals with the ability to recontribute these distributions using the tax-free rollover rules, which do not normally apply to RMDs. Generally, IRA or defined contribution plan distributions would not be subject to tax if the plan participant rolls the distribution into another eligible plan within 60 days. On June 23, 2020 the IRS published notice 2020-51, providing for an extension of the 60-day period to August 31, 2020.
The IRS Notice also provides relief for taxpayers that received RMDs subject to the 12-month rule. Generally, rollovers of an IRA to the same or different IRA can only take place once per 12-month period. For 2020, these specific RMDs are not subject to the 12-month rule. Taxpayers that received their RMD in multiple payments can roll over the aggregate distributions tax free.
Taxpayers should be aware that the gross distribution, prior to tax withholding, should be rolled over to avoid income tax on any portion of the 2020 distribution. Plan administrators will not return such tax withholding. The taxpayer can request a refund of the withholding when they file their 2020 income tax return.
Taxpayers should contact their plan administrators if they would like to take advantage of this opportunity. For a more in-depth analysis on IRS Relief for Individuals Taking Retirement Plan Distributions In 2020 click here.
What if I turned 70 ½ in 2019 or 72 in 2020?
For IRA owners that turned 70 ½ in 2019, but deferred their first RMD to April 1, 2020, the delayed 2019 RMD is not required to be withdrawn.
For IRA owners that turn 72 in 2020, because their initial RMD falls in 2020, there is no requirement to take a distribution, even if they would have deferred payment to April 1, 2021.
As a result of the 2020 RMD waiver, IRA owners who turned 70½ in 2019, but delayed their RMD to 2020, and IRA owners who turn 72 in 2020 have until December 31, 2021 to take their initial RMD.
What if I am a beneficiary required to take an RMD from an inherited IRA?
The waiver of the RMD applies to beneficiaries of inherited IRAs. If the 2020 RMD has not yet been taken, there is no requirement to do so. If the RMD has already been distributed for 2020, beneficiaries have until August 31, 2020 to roll the distribution back into the same IRA that it originally came from.
What if I am a beneficiary taking RMDs under the 5-year Rule?
The 2020 RMD waiver applies to beneficiaries of inherited retirement accounts, under which the 5-year rule was elected or required. Any individual beneficiary may elect to distribute inherited IRA assets over the five years following the owner’s death. Any non-individual beneficiary (except for a qualified trust) must use the five-year rule if the original owner dies before beginning to take RMDs. The 5-year period is determined without regard to 2020, therefore beneficiaries get an additional year to withdraw the retirement funds.
What if I make Qualified Charitable Distributions (QCDs) annually?
The waiver of the RMD does not preclude the ability to make qualified charitable distributions (QCD) from your IRA. The Internal Revenue Code allows for up to $100,000 of QCDs directly to a qualified public charity, which directly reduces the taxable portion of retirement distributions. For those individuals that are charitably inclined, donating funds that have grown tax deferred is an optimal estate planning strategy. Although an individual may forgo their RMD in 2020, they still can direct up to $100,000 of their retirement funds to a qualified charity. If a taxpayer does not receive a taxable retirement distribution in 2020, the QCD is not available as a deduction against taxable income. However, it will reduce the overall value of retirement funds used to calculate future RMDs.
The SECURE Act and CARES Act made changes that will impact retirement plan benefits for retirees and beneficiaries of inherited plans. Both acts trigger planning opportunities that should be applied on an individual basis based on each taxpayer’s circumstance.
Berdon LLP New York Accountants