The Coronavirus Aid, Relief, and Economic Security (CARES) Act was signed in to law on March 27, 2020. The Act waives the requirement to take minimum distributions for most taxpayers during 2020 and may provide relief for taxpayers that have already taken their distributions. Additionally, the Act enhances the ability to take loans and provides other tax benefits.
Background of Required Minimum Distributions
In general, an IRA owner or a retirement plan participant must start taking required minimum distributions (RMDs) upon reaching age 72 (or age 70½ if he or she reached aged 70½ before January 1, 2020).
The RMD rules apply to tax-deferred retirement accounts such as IRAs (Traditional, SEP, Simple) and qualified retirement plans such as 401(k), 403(b), 457(b), profit-sharing plans, and other defined-contribution plans.
The deadline for taking RMDs is December 31 of each year. However, the first RMD may be delayed to April 1 of the year following the calendar year in which the individual turns 72 (or age 70½ if he or she reached aged 70½ before January 1, 2020). In the case of a workplace retirement account, an individual who is still working and not more than a 5% business owner may be able to delay taking an RMD until April 1 of the year after retirement.
If 2019 happens to be the first RMD year, the deadline date could be as late as April 1, 2020.
Required Minimum Distributions Waived for 2020
The CARES Act has eliminated the requirement to take RMDs in calendar year 2020 for IRAs and specified defined contributions plans (including 401(k) plans).
The waiver applies to those distributions that are required to be made in 2020, which also includes distributions for 2019 that were not paid in 2019.
RMDs for 2020 are also waived for inherited accounts. The rules that govern RMDs for inherited accounts depend on the relationship of the inheritor to the original deceased owner, such as a spouse, non-spouse (e.g., son, brother), or entity (trust, estate). The post-death RMD distribution rules for those who die after December 31, 2019, are governed by the SECURE Act.
RMDs are not waived for defined benefit plans.
What if an RMD is already taken in 2020?
For those who already took a withdrawal of their RMD in 2020, there may be an option to roll the money over to the same account or another qualified retirement plan within 60 days.
The rollover is possible for those distributions that meet the definition of an eligible rollover distribution and are within the 60-day window, subject to the limit of one IRA rollover per 12 months (explained below).
Distributions from inherited IRAs are not eligible to be rolled over.
Eligible Rollover Distributions
Generally, any distribution from a qualified plan or IRA, meeting the definition of an eligible rollover distribution, can be rolled into another eligible retirement plan. An eligible rollover distribution specifically excludes a required minimum distribution. However, with the CARES Act waiver of RMDs for 2020 with respect to specific plans, such RMDs may now qualify as eligible rollover distributions.
60-Day Rollover Rule
The rollover of eligible distributions must occur within 60 days after the funds are received.
Since the CARES Act was not enacted until the end of March 2020, the 60-day rollover window had already closed on early 2020 RMD distributions. IRS guidance issued through IRS Notice 2020-23, dated April 9, 2020, extends the 60-day rollover period until July 15, 2020, provided the rollover period would otherwise fall between April 1 and July 14, 2020.
This extension may provide additional time to complete a rollover but will not help every individual who already took their 2020 RMDs. For example, it will not help those:
- Who took their RMDs before February 1, 2020;
- Non-spouse beneficiaries who took RMDs from inherited retirement plans before CARES because such beneficiaries are always prohibited from rolling them over.
One IRA Rollover Per 12-Month Limit
An individual can make only one rollover from an IRA (as opposed to a qualified plan) in any 365-day period. This one-year prohibition applies from the date the first IRA withdrawal is made.
The extension of the 60-day rollover period until July 15, 2020, per IRS Notice 2020-23, will not help people who took their IRA RMDs in the form of monthly installments and cannot roll them all back into the IRA because of the once-per-12-months limit.
Alternative Options for Distributions that Fail to Qualify for a Rollover
When an individual fails to qualify for an eligible rollover distribution due to being a non-spouse beneficiary, being past the 60-day rollover window (including the extension to July 15, 2020), or not being able to meet the “One IRA Rollover Per 12 Month Limit”, they may want to explore other options.
One such option is the COVID-19-Related Distribution.
COVID-19-Related Distribution
First, the CARES Act waives the 10% additional tax on any coronavirus-related distribution up to $100,000. The 10% excise tax generally applies to individuals who withdraw from their IRA or plan prior to reaching age 59½.
A coronavirus-related distribution is any distribution that is made on or after January 1, 2020, and before December 31, 2020, from an eligible retirement plan to a qualified individual.
A qualified individual is an individual:
- Who is diagnosed with COVID-19
- Whose wife or dependent is diagnosed with COVID-19, or
- Who experiences adverse financial conditions due to quarantine, being laid off or reduced work hours, being unable to work due to lack of child care, closing of business owned or operated due to COVID-19
The administrator of the plan may rely on the certification of the individual that he/she satisfies the third condition above.
The individual has the option to either:
- Contribute the distribution back to the retirement plan within three years, where the withdrawal will be treated as a direct trustee-to-trustee transfer and thereby not be subject to the restrictions applicable to an eligible rollover distribution,
- Consider the withdrawal as taxable income entirely in 2020, or
- Include the distribution in income over three years; 1/3rd in each of 2020, 2021, and 2022.
It is important to check with the employer’s plan administrator if the plan allows for rollover contributions since a plan is not required to change its terms or procedures to accept repayments.
Another alternative option, in the event a distribution fails to qualify for a rollover, is to borrow from the increased loan limits of an eligible retirement plan (not including an IRA).
Loans from Qualified Plans
The CARES Act provides for the option for loans to be borrowed from pension plans (but not from IRAs, as loans from IRAs are not permitted) up to $100,000 by a qualified individual and made within the 180-day period beginning on Mar 27, 2020. This is an increase from the previously allowed amount of $50,000. Typically, such borrowed monies are to be repaid within five years, but no payments will become due until 2021.
The IRS has issued a series of questions and answers with respect to coronavirus-related relief for retirement plans and IRAs.
The CARES Act includes other provisions that affect qualified plans, including 401(k) plans and defined benefit plans, as well as IRAs. If you want to learn more about the changes we have highlighted here, or others that may impact you, contact your Perkins & Co advisor. If these law changes create opportunities for you, you’ll want to act soon to fully capture the benefits.
Disclaimer: The information contained in this communication, including attachments and enclosures, is not intended to be a complete analysis of all related issues. Nor is it sufficient to avoid tax-related penalties. It has been prepared for informational purposes and general guidance only and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is made as to the accuracy or completeness of the information contained in this publication, and Perkins & Company, its members, employees and agents accept no liability, and disclaim all responsibility, for the consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.