The CARES Act: Retirement Account Provisions

Posted In: COVID-19 Market Update

The Coronavirus Aid, Relief, and Economic Security (CARES) Act of 2020 is an estimated $2 trillion package. In this series, we will discuss four of the most notable provisions for individuals and families.

 

Required Minimum Distributions are waived in 2020

The CARES Act suspends Required Minimum Distributions (RMDs) during 2020. The relief provided by this provision is broad and applies to Traditional IRAs, SEP IRAs, and SIMPLE IRAs, as well as 401(k), 403(b), and Governmental 457(b) plans. Furthermore, the relief applies to both retirement account owners and beneficiaries taking stretch distributions.

 

The CARES Act not only eliminates RMDs for 2020 but also any RMD that otherwise needed to be taken in 2020. More specifically, individuals who turned 70 ½ in 2019, but did not take their first RMD in 2019 (and thus, would have normally been required to take such a distribution by April 1, 2020,  as well as a second RMD for 2020 by the end of 2020) do not have to take either their 2019 RMD or their 2020 RMD.

 

Returning unwanted 2020 RMDs that have already been distributed (Act fast!)

Despite the fact that we’re not quite yet through the first quarter of the year, a number of individuals have already taken their RMDs – or at least, what they thought would be their RMD – for 2020. Now, in light of the CARES Act, these individuals may wish to ‘return’ unwanted and no longer necessary RMDs.

 

For IRA, 401(k), and other retirement account owners, this may be possible two different ways. In a best-case scenario, the ‘RMD’ distribution will have taken place within the last 60 days, and the distribution won’t be prevented from being rolled back due to the once-per-year rollover rule (either because it came from a plan, is going to a plan, or because no IRA-to-IRA rollover has been made within the past 365 days). In such instances, an individual can simply write a check, or otherwise transfer an amount equal to the ‘RMD,’ back into a retirement account before the end of the 60-day rollover window.

 

For retirement account owners who took their RMD very early in the year, and for whom the 60-day rollover window has already expired, there is another potential approach. If it can be shown that the individual has been impacted by the COVID-19 crisis enough to qualify under the liberal guidelines outlined for a Coronavirus-Related Distribution, then the rollover can still be completed anytime for the next three years (from the date the distribution was received).

 

What about beneficiaries who took RMDs already? Is there any relief for them? Unfortunately, the answer is no. A beneficiary is not eligible to make a rollover. Period. As such, even if the distributed RMD was made within the last 60 days, there is no way to get it back into the inherited retirement account.

 

2020 is ignored for purposes of the 5-Year Rule

A final item addressed by the CARES Act’s suspension of RMDs for 2020 is the way it impacts the 5-Year Rule that applies to Non-Designated Beneficiaries (e.g., charities, estates, non-“See-Through” Trusts) who inherit a retirement account from decedents who die prior to reaching their required beginning date.

 

Such beneficiaries must distribute the entirety of their inherited assets by the end of the fifth year after the retirement account owner’s death. The CARES Act, however, allows 2020 to be ignored, or simply not counted as one of those five years. Thus, for Non-Designated Beneficiaries subject to the 5-Year Rule who inherited from a decedent dying between 2015 and 2019, the 5-Year Rule is effectively a 6-Year Rule!

 

Any opinions expressed in this forum are not the opinion or view of American Portfolios Financial Services, Inc. (APFS) or American Portfolios Advisors, Inc.(APA) and have not been reviewed by the firm for completeness or accuracy. These opinions are subject to change at any time without notice. Any comments or postings are provided for informational purposes only and do not constitute an offer or a recommendation to buy or sell securities or other financial instruments. Readers should conduct their own review and exercise judgment prior to investing. Investments are not guaranteed, involve risk and may result in a loss of principal. Past performance does not guarantee future results. Investments are not suitable for all types of investors. To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purposes of avoiding penalties that may be imposed by law. Each tax payer should seek tax, legal or accounting advice from a tax professional based on his/her individual circumstances.
This material is for informational purposes only. Neither APFS nor its Representatives provide tax, legal or accounting advice. Please consult your own tax, legal or accounting professional before making any decisions. Information has been obtained from sources believed to be reliable and are subject to change without notification. The information presented is provided for informational purposes only and not to be construed as a recommendation or solicitation. Investors must make their own determination as to the appropriateness of an investment or strategy based on their specific investment objectives, financial status and risk tolerance. Past performance is not an indication of future results. Investments involve risk and the possible loss of principal.

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