Recent legislation has significantly impacted tax and financial planning for individuals in 2020, specifically from the Setting Every Community Up for Retirement (SECURE) Act and the Coronavirus Aid, Relief, and Economic Security (CARES) Act. Required Minimum Distributions (RMDs), which are required by U.S. tax law for certain tax-deferred accounts (IRAs, Simplified Employee Pension (SEP) and Simple IRAs), were no exception to the impact, with some changes that are ongoing and others that are exclusive to 2020.
Why Estate Planning?
The following notes some top planning considerations for now and in the immediate future for RMDs as they relate to effects by recent legislation.
- Starting Age Increase – Under the SECURE Act, the starting age at which account owners must begin taking RMDs has increased from the year in which they turn 70 ½ to the year in which they turn 72. To determine the benefit of delaying RMDs, individuals should meet with a financial advisor to assess if a delay works best with their overall financial strategy.
- RMDs Waived in 2020, Funds May Be Replaced by Aug. 31 – The CARES Act waived RMDs in 2020 for two reasons: to make sure individuals were not forced to take distributions on a 2019 account value appearing to be overstated after the first quarter of 2020; and to allow investment accounts ample time to recover to prevent individuals from withdrawing from swiftly decreasing accounts. In June 2020, the Internal Revenue Service (IRS) also released Notice 2020-51, which extended the rollover deadline for RMDs to Aug. 31, 2020, and covers RMDs taken at any time since January 2020. The Notice also states that RMD repayments would not count against the once-per-year rollover rule, meaning that 2020 monthly RMDs may be repaid by Aug. 31, 2020. Individuals may wish to repay funds taken in 2020 to allow tax-free money to grow for one more year in the account. If you normally withhold taxes from your RMD, you may want to contact your tax advisor to make sure your 2020 estimated tax payments are sufficient.
- Roth Conversions – Since RMDs have been waived in 2020, now may be a good time to consider a Roth conversion strategy to lessen tax burden. RMDs are not eligible for Roth conversions, but because there are no RMDs in 2020, an individual can convert 100 percent of their distribution from a traditional IRA to a Roth this year.
- Qualified Charitable Distributions (QCDs) – In order to fulfill any philanthropic goals, RMDs may be used through QCDs, which allow individuals over 70 ½ to annually donate up to $100,000 from their IRA to a qualified public charity without running the distribution through their tax return. While RMDs are waived in 2020, QCDs may still be a great planning tool for IRA account owners who wish to make significant charitable donations.
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