Amid the craziness that is 2020, I wanted to bring a few important IRA updates for this year to your attention. Some changes are temporary pandemic relief resulting from the CARES Act while others are here to stay due to the SECURE Act that was passed in late 2019.
I’ll start with the temporary changes. The CARES Act enacted in March of 2020 provides for special distribution options and rollover rules for retirement plans and IRAs. Perhaps the most important and impactful result of this act for many of our clients is the waiver of 2020 required minimum distributions (RMDs). Once IRA account owners reach a certain age, they are required to withdraw a minimum amount each year calculated using the IRS life expectancy table. Inherited IRA owners are also required to take annual RMDs. The CARES Act enables any taxpayer with an RMD due in 2020 to skip it for this year.
The reasoning behind this reprieve is most accounts saw a steep decline at the end of 2020. Since RMDs are calculated on 12/31 values, the required distribution would have been a much larger percentage of the account. Instead, investors are now allowed to leave those funds invested, potentially recouping some of the market losses as the economy turns around. Furthermore, anyone who had already taken an RMD for 2020 prior to the exception may roll those funds back into a retirement account by August 31st, 2020. The RMD waiver and rollover opportunity apply to both IRA owners and beneficiaries of inherited IRAs.
There are some additional distribution and loan options for qualified individuals who faced Covid related hardships such as being diagnosed with Covid-19 or experiencing financial consequences due to being quarantined, furloughed, laid off, left without child care or forced to close or reduce hours for their business. Individuals may withdraw up to $100,000 from retirement accounts in 2020 and the 10% early withdrawal penalty will not apply. You would have to pay takes on the entire distribution, but you can spread it over 3 years. You also may repay a coronavirus distribution within 3 years.
Switching gears to the permanent IRA changes, the SECURE Act passed last December and took effect January 1st. Two big changes include increasing the RMD age from 70 ½ to 72 and updating the distribution rules for inherited IRAs.
First off, the 70 ½ RMD starting age was based on life expectancies in the early 1960’s. As Americans live longer and an increasing number are working beyond traditional retirement age, the House Committee decided to up the age for starting RMDs. IRA owners who turned 70 ½ in 2019 still must begin taking an RMD this year but those who turn 70 ½ in 2020 and later will not be required to withdraw RMDs until age 72.
Secondly, significant changes were made to the rules for IRA beneficiaries if the IRA owner dies in 2020 or later and the beneficiary is not an “eligible beneficiary”. Eligible beneficiaries include the surviving spouse of the original IRA owner, a minor child of the owner, anybody who is disabled or chronically ill, and any designated beneficiary who is not more than 10 years younger than the owner. Stretch IRAs, IRAs that allow the beneficiary to withdraw RMDs based on their own life expectancy, are no longer allowed for ineligible beneficiaries. These beneficiaries must instead withdraw the entire account by the 10th year. The distributions do not have to occur evenly over the 10 years.
For eligible beneficiaries and for accounts in which the owner died in 2019 or earlier, the old rules still apply. A spousal beneficiary can roll the account into his or her own IRA or continue to own the account as a beneficiary. For non-spouse beneficiaries, the beneficiary must take an RMD based on his or her own life expectancy using the Single Life table or can opt to distribute the entire account within 5 years.
I hope you find this article helpful. Should you have any additional questions, feel free to reach out to me.