In March, President Donald Trump signed the $2 trillion Coronavirus Aid, Relief, and Economic Security (CARES) Act. Designed to sustain and stimulate the economy, it temporarily suspended required minimum distributions for retirement plans.

Normally, clients must withdraw a certain amount from their tax-sheltered retirement accounts when they are age 72 or older. This suspension—which applies to all RMDs due in 2020, including leftover 2019 distributions that were required to be paid by April 1, 2020—pertains to IRAs (traditional, SIMPLE, SEP, and inherited) and defined-contribution retirement accounts, including 401(k)s, 403(b)s, the federal Thrift Savings Plan and government 457(b) plans. It does not impact defined-benefit plans, tax-exempt 457 plans or Roth IRAs, which don’t have required minimum distributions.

Clients will need to make decisions about how to approach this new development fairly quickly, says Marshall Heitzman, head of advanced planning at CUNA Mutual Group Annuities in Madison, Wis.

“Reach out to clients as soon as possible,” Heitzman says, “particularly if the client has a pre-scheduled distribution.”

What to advise them, however, varies.

The Case For Skipping The RMD
One argument for skipping the required distribution is that most account values plunged in March and April, and you don’t want to take withdrawals when the market is down. You’re supposed to buy low and sell high.

What’s more, the exact amount of the RMD is partly based on the account value at the close of the prior year, and markets were riding high at the end of 2019. “Account owners would have been forced to take a bigger chunk out of their remaining retirement savings,” says Kimberly Foss of Empyrion Wealth Management in Roseville, Calif.

Skipping this withdrawal also gives clients time to recover from the market downturn—assuming they can afford to live without the income.

Assess Spending Needs
“If you depend on your RMD to maintain your lifestyle, go ahead and take a distribution,” says Foss. “This year, you can take a smaller percentage from your account if you want, but still take enough to meet your needs.”

Advisors should help clients assess those needs. “There is no point going into debt just because you don’t want to take a distribution,” says Andrew Arnold, CEO and senior wealth advisor at Centerline Wealth Advisors in Louisville, Ky.

He notes that, at this point, it looks as if the RMD requirement will return to normal next year. But the dollar amount of next year’s RMD will likely be higher. That’s because it’s based on not just the account’s year-end value but also the account holder’s life expectancy, which decreases every year. “Each year, an IRA owner [has] to take a larger percentage of their account balance,” says Arnold.

Tax Implications
Omitting this year’s withdrawal also means avoiding the taxes that would come with it. “If an individual will have other sources of income in 2020 that will put them into a higher tax bracket, suspending RMD is certainly appealing,” says James Daniels, an accountant, attorney and managing director at UHY Advisors NY in Albany, N.Y. “If someone is in a low tax bracket in 2020 but is expecting more income in 2021, it may not be wise to defer the income.”

Ken Moraif, a senior advisor at Retirement Planners of America in Plano, Texas, concurs. “Clients and advisors need to understand their current marginal tax bracket and what [it] may be in the future,” he says. “If they feel they have the lowest income they can expect going forward, they may want to continue taking out their RMD. Remember, taking out your RMD does not mean you have to spend it.”

 

If The RMD Was Already Taken …
If you already took your RMD, you have 60 days to roll the funds back in. That’s good news for some, but not all. “If a person’s 60-day deadline occurred on or after April 1, they have until July 15” to reinvest it, says Carol McClarnon, a Washington, D.C.-based partner at Eversheds Sutherland, a global law practice. (An additional extension is pending.)

Ben Barzideh, a wealth advisor at Piershale Financial Group in Barrington, Ill., adds that anyone who is outside the 60-day rollover window can get an extension “if they can show they were negatively impacted by the Covid virus.”

For those who took their RMD as cash from a stock fund, reinvesting the money might enable them to buy more shares than they originally had. “In essence, this means you’re able to buy back into an investment that’s actually become cheaper,” says Larry Divers, executive vice president of Cannon Financial Institute in Athens, Ga.

On the other hand, those who took their RMD not as cash but as stocks or other securities may be stuck. McClarnon says, “The general rule is that rollovers have to be made using the same property as was distributed. So … that same stock would have to be returned.”

If the security has lost value since the distribution, though, there could be tax consequences. You roll back the same security that was distributed regardless of what its value is on the date of the rollback. But in your next tax return, you will have to explain any change in value.

A Few Caveats
Clients who skip this year’s required minimum distribution must be careful not to overlook next year’s requirements. “Those receiving automated distributions … may need to restart those payments,” cautions Dave Stinnett, head of the strategic retirement consulting group at Vanguard in Malvern, Pa.

Experts also warn that returning an RMD can only happen once in a 12-month period. “People who were taking their 2020 IRA RMD in monthly installments can only put back one of those installments,” says Natalie Choate, an estate planning attorney with Nutter McClennen & Fish in Boston.

The rules are a little different, too, for beneficiaries who inherited tax-deferred accounts. They’re eligible to skip this year’s RMD, but they can’t return the funds if they’ve already taken them—with the possible exception of spouses, who can execute what’s called a spousal rollover. In general, though, beneficiaries cannot “enjoy the same opportunity to replace already distributed amounts,” says Heitzman at CUNA Mutual.

What To Do With RMD Funds
Advisors offer a few ideas about what clients can do with their required minimum distributions if they don’t need the income.

They can convert it—or a part of it—to a Roth IRA. This doesn’t provide an immediate tax deduction, but there will be no penalties or additional taxes when funds are withdrawn. “A Roth conversion could be done without having to sell shares,” says Philip D’Unger, senior team leader of wealth planning at CAPTRUST in Raleigh, N.C.

Another idea is to donate to charity. Shelly-Ann Eweka, a wealth management director at TIAA in Charlotte, N.C., says the CARES Act increased the limit on charitable deductions from 60% of adjusted gross income to 100%, and those who don’t itemize can deduct donations up to $300.

Meanwhile, Congress is considering a further stimulus bill that would, in part, wipe out the RMD requirement for 2019 as well. “To be honest, this provision is the ultimate head-scratcher, since 2019 RMDs are all taken out by now,” says Jamie Hopkins, Philadelphia-based managing director of Nebraska’s Carson Coaching.