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.

The Once-Per-Year Rule Still Applies
Slott also cautioned advisors to be aware of the once-per-year IRA rollover rule that states only one distribution can be put back per year. So under current law clients who take their RMDs as monthly income from their retirement accounts would only be able to return and remove the income taxes from one of their monthly distributions. Slott also cautioned that the once-per-year IRA rule refers not to calendar years, but a requirement that at least 365 days pass between each returned distribution.

“If your client has done any IRA to IRA or Roth IRA to Roth IRA rollover, the 60-day relief won’t help them, and you have to watch out for that,” said Slott. “That’s a problem that can only be fixed by Congress, and thus far any further stimulus or relief is dead-on-arrival in the Senate. It’s on Congress’s radar, they know the once-per-year rule is a problem.”

Slott also reminded listeners that non-spouse beneficiaries cannot take a rollover, and that qualified company retirement plans are exempt from the once-per-year rule. Likewise, rollovers from a retirement plan into an IRA that are then returned to the retirement plan are not subject to the once-per-year rule, nor are Roth conversions.

In 2021, advisors should plan for their clients to take RMDs as if 2020 “had never happened,” said Slott. However, clients and beneficiaries may still want to consider taking their RMD for 2020 while taxes are at generational lows.

“The CARES Act is a $2 trillion check on a bank account with no money in it,” he said. “At some point, rates are going to have to come up and the foundation of good tax planning is to always pay taxes at the lowest possible rates. It’s all about the tax-rate arbitrage, so start thinking about clients, prospects and beneficiaries who may be able to sneak money  out now when taxes are low.”

The rules for qualified charitable distributions (QCDs) from IRAs remain largely unchanged, said Slott, except for a quirk that came out of 2019’s SECURE Act retirement legislation which raised the age for RMDs to age 72, but kept the age for taking a QCD at 70.5. That offers retirees a gap where they can take qualified charitable distributions out of their traditional IRAs and lower the amount they will be required to take out as distributions in the future.

Covid-19 Distributions And Loans
Advisors have to be very careful working with clients who want to take coronavirus-related distributions (CRDs) as allowed by the CARES Act, because the rules to qualify are very specific. Only two groups of people qualify to take a CRD from a qualified company plan or IRA—people who are sick or who have a family member fall ill with Covid-19, and those who are experiencing financial hardships.

“It’s not because you lost money in the market; you don’t qualify unless you’re sick or you lost your income, with other factors potentially to be determined by the Treasury. So far, those are the factors,” said Slott.

While anyone at any age can take a CRD as long as they qualify, not all company retirement plans are permitting participants to take CRDs, said Slott. Advisors may be able to help participants work around the issue by helping them take the money out for a hardship withdrawal, but treating it for tax purposes like a CRD. For the time being, the IRS will allow participants to treat hardship withdrawals as if they were CRDs.

If clients are qualified individuals, they can take up to $100,000 as a CRD in 2020, and spread the income over three years for tax purposes, but doing so should be a “last resort,” said Slott.

Under prevailing law and the stipulations of the CARES Act, a coronavirus-related distribution can be converted to a Roth IRA, said Slott, but this is also an area in which to tread carefully.

“I don’t think this is what the IRS had intended,” he said. “Let’s go back to who qualifies for a CRD: individuals who are sick, individuals with spouses or children who are sick, individuals under quarantine or otherwise unable to work. I don’t see being able to convert to a Roth IRA on that llist. Can it be done? Maybe, but I think this is pushing the envelope and the IRS might shut the door on this.”

Still, the most likely outcome for those trying to create a Roth IRA conversion using a CRD is that the IRS makes them take all of the income on one year’s taxes instead of spreading it over three years to potentially pay a lower rate.

Many retirement participants have seen their retirement plan loan availability increase from $50,000 to $100,000, said Slott, but not all plans offer loans and plans are not required to allow for the larger loan availability. The qualifications for CRDs also apply to the larger coronavirus-related plan loans.

Similarly, while the CARES Act allows plans to suspend loan repayments for up to a year, plans are not required to do so.

The End Of The Stretch IRA
Slott also answered questions about 2019’s SECURE Act, which, as already mentioned, raised the age at which required minimum distributions begin from 70.5 to 72. But more important, it eliminated the “stretch IRA” strategy for beneficiaries of inherited IRAs. The stretch IRA was a powerful estate planning strategy that allowed distributions from an inherited IRA to be “stretched” across the entire life expectancy of the beneficiary, leading to lower required distributions—and lower taxes—over time.

The elimination of the stretch IRA makes more advanced estate planning techniques, including life insurance and trust planning, more valuable, said Slott.

“The IRA has been severely downgraded and is no longer a great option for transferring to beneficiaries,” said Slott. “Use RMDs to get the money out of there. Roth conversions now work much better. Life insurance now works much better. Charitable remainder trusts now work much better. Even though most people have had plans for 20 to 30 years under those old rules, when Congress changed the rules, they pulled the rug out from under all of those plans.”

Similarly, thanks to the SECURE Act, simplified IRA-trust estate planning strategies like the conduit trust are no longer as effective as before. Conduit trusts are usually set up to ensure that a large IRA balance doesn’t pass to a beneficiary in one lump sum. Now, all traditional IRA assets have to be paid to beneficiaries and taxed within 10 years after the death of the original account owner, meaning that conduit trusts can no longer serve as an effective control on the wealth transfer.

In lieu of the stretch IRA strategy, Slott suggested a number of alternatives: Naming a spouse as a beneficiary; tax-bracket planning during life and after death; making qualified charitable distributions; naming multiple beneficiaries; Roth IRA conversions and life insurance.

“Take some IRA money down now at today’s bargain basement lowest rates; that’s good tax planning,” he said. “Use it for permanent cash-value life insurance, that’s better than an IRA right now and it doesn’t’ have complex tax problems, no RMDs. The client can make anything they want out of life insurance and get precisely want they want. Clients usually want two things—post-death control of their assets and lower taxes or no taxes. With life insurance, you can get both and you can get both with a Roth IRA, too.”