Even though the CARES Act, Congress’s $2.5 trillion coronavirus relief provision, does not require retirees to take minimum distributions from their qualified accounts, they may want to anyway, said IRA and tax expert Ed Slott.
In "Answers To Advisors' Questions On The 2020 Retirement Tax Rules," a Tuesday afternoon webinar, Slott said that the provisions of the CARES Act, combined with changes to taxation and retirement rules in 2019’s SECURE Act, make 2020 a unique year for retirement income.
“In some ways, what the SECURE Act really did, what Congress really has done, is incentivize people to do better planning, the kind of planning they probably should have been doing all along,” said Slott.
While many of the CARES Act provisions are only relevant for individuals who have experienced a health or financial hardship due to the outbreak, Slott said that any person required to take a required minimum distribution in 2020 qualifies to waive that distribution for that year. That includes not just participants in workplace defined contribution plans, but IRAs and inherited IRAs.
“It’s clear that beneficiary RMDs are waived, and that includes Roth IRA beneficiaries,” said Slott. “If the account owner dies during the year, the year-of-death distribution is waived. That can remove a burden from beneficiaries who otherwise have to make sure that the RMD is taken.”
If a required distribution has already been taken for 2020, Slott said that it can be turned into a Roth IRA conversion. Because they’re no longer required because of the CARES Act, they’re technically no longer RMDs.
Put another way, for 2020, clients age 72 and older no longer have to meet the threshold for a required minimum distribution before converting traditional IRA assets to a Roth.
“Look at today’s [income tax] rates,” said Slott. “Now that you don’t have RMDs, it might be a good time to move some of that money to a Roth and stay in low tax brackets. It’s a great planning opportunity. RMDs are required minimum distributions—they’re the minimum, you can always take more. For 2020 the required minimum is zero. So yes, what would have been RMDs can be converted without having to satisfy the RMD.”
Slott did warn that the CARES Act is still being interpreted, and the IRS could put a stop to the strategy at any time.
Clients who already took a 2020 RMD should be able to put the distribution back and avoid the tax bill, but as of now they can only return the distribution if it was taken on Feb. 1 or later. And these clients only have until July 15 to put the money back. The IRS only provided relief in the form of extending the 60-day deadline for returning a distribution until July 15 because of the crisis.
The IRS already has a history of providing relief for retirees who already took a distribution, said Slott, having done so during the 2008-2009 global financial crisis when RMDs were waived. In that scenario, the IRS announced in 2008 it would not require RMDs for the 2009 calendar year, yet still allowed anyone who took an RMD during 2009 to return the distribution. For that reason, Slott said any client who took a distribution in January should just “hold off” as the IRS should act before the July 15 deadline to make estimated tax payments.