A REALLY silver lining for all IRA owners in Coronavirus Relief bill

In an effort to alleviate financial burdens for seniors and those directly impacted by the worldwide pandemic of 2020, Congress passed and President Trump signed the “Coronavirus Aid, Relief, and Economic Security Act” or “CARES Act” on March 27, 2020.

My Dad, Dec. 2019

The 880 page law allows individuals broadly impacted by COVID-19 to withdraw funds without penalties, take out loans and “suspends” required minimum distributions (RMD) from most retirement plans for the year 2020 including IRAs, 401(k)s, 403(b)s, SEP IRAs, SIMPLE IRAs, traditional IRAs.

1. How can I be eligible to withdraw funds from my IRA?

If you are an individual: (1) who is diagnosed with COVID-19; (2) whose spouse or dependent is diagnosed with COVID-19; or (3) who experiences adverse financial consequences as a result of being quarantined, laid off, having work hours reduced, being unable to work due to lack of childcare due to COVID-19, closing or reducing hours of a business owned or operated by the individual due to COVID-19, or other factors as determined by the Treasury Secretary, you will be eligible to withdraw funds from your retirement accounts.

2. What are the special COVID-19 rules?

In normal times, a 10% penalty applies to retirement account and IRA withdrawals taken before age 59 1/2 unless an exception applies – which CARES now provides for draws taken anytime in 2020. Up to $100,000 may be taken as a distribution from a 401(k) or similar workplace retirement plan or an IRA, and even if taken prior to age 59 ½, the 10% penalty is waived. Moreover, while income taxes on the withdrawal will be owed, CARES allows for an extension of up to three years to pay the taxes and the normal 20% federal tax withholding for retirement account distributions is also waived.

If the individual’s financial situation turns around, the withdrawal may be undone with a redeposit into the account as long as the amount is reconstituted within three years of the withdrawal instead of the usual 60 days from the date of distribution. If income taxes had been paid, an amended tax return may be filed to get the funds back.

3. Could I take out a loan from my retirement funds?

Although loans are not available from an IRA, most 401(k) plans allow loans. Under the new COVID rules, until September 23, 2020 a plan participant may borrow 100% of the account balance up to $100,000 (less any outstanding loans).

4. What COVID benefits exist for Seniors (over 70 ½)?

An RMD is the minimum amount of money that you must take out of your retirement account each year after you have reached your required beginning date of 72 (previously 70 ½ prior to 12.31.2019). The IRS has updated its actuarial tables to specify the required distribution amounts and, in the case of traditional IRAs, the amount of the withdrawal is taxed as income at your current tax rate. The IRS will impose a 50% penalty on any missed RMDs. You must begin taking RMDs from a traditional IRA by April 1 of the year after you turn 72, also known as the “required beginning date or RBD”. Note that Roth IRAs have no RMD or RBD for the owner but the persons inheriting a Roth do have RMD and RBD. In other words, the term “required beginning date” does not apply to post-death RMDs (inherited), it only applies to lifetime distributions.

But, the new COVID ruled under the CARES Act allows for a suspension of the RMD in 2020 thereby reducing the amount of taxable income for 2020 if you were required to take a distribution from your employer defined or self-employed plan in 2020. Similarly, the law waives all RMDs, regardless of whether the RMDs were due to the original owner or a beneficiary who inherited the account. In other words, both lifetime and post-death RMDs due in 2020 are suspended. The rule seems simple, but triggered questions among account owners.

5. What if you already took all or part of your 2020 RMD before March 27, 2020?

In order to avoid including a 2020 IRA distribution in gross income, the CARES Act allows for a limited rollover of the RMD amount already taken within 60 days of the withdrawal. The distribution, whether in property or cash, must be returned to the same account or deposited into another qualified retirement plan.

CARES does not allow for a rollover of assets withdrawn from an inherited IRA. Because the rollover is limited to 60 days, the extension does not apply to any distributions taken before February 1, 2020. The 60-day rollover can be used only once per taxpayer every 12 months. Thus, even with the limited CARES rules, a rollover in late 2019 will prohibit another one until more than 12 months have passed. Similarly, if you took monthly distributions from the IRA then only one rollover, or only one months’ withdrawal may be returned within the 60-day period. The potential good news is that the one-per-12-month limit applies only to rollovers from IRAs to IRAs. If you still have a 401(k) account or other qualified retirement plan, you can roll over the IRA distribution to a 401(k).

6. Can I take funds out and roll them into a Roth IRA?

Because the traditional IRA withdrawal in 2020 is not considered an RMD, it may be rolled over into a Roth IRA. The distribution will be included in gross income and income taxes paid, but with the substantial drops in value in 2020, this may be a good time to transfer the funds, particularly since there is no RMD requirement for 2020.

7. Does the person who turned 70 ½ in 2019 need to draw in 2020?

Under the old rule, a person who turned 70 ½ in 2019 would have been required to take their first distribution on April 1, 2020 (required beginning date). Under the CARES Act, if you took that first RMD during 2019, the required beginning date was established but there is no need to take the 2020 distribution. You took the RMD, and it will be included in your gross income for 2019. But if the RMD wasn’t taken in 2019, the suspension applies. Note, however, that if the plan owner dies before April 1, 2021 then for purposes of applying the IRS inheritance rules, it will be as if the person’s required beginning date did occur in 2020. In other words, for a person whose RBD is April 1, 2020, and whose RMD otherwise payable on such RBD is “waived” by CARES, April 1, 2020, shall still be considered his/her RBD for all other purposes of the minimum distribution rules—such as whether such person’s later death occurs before or after his/her RBD.

Any more questions on CARES? Please call us at TREVERI LAW, PC (505-835-6580) today!

Dedicated to Protecting those you love for your family's health, wealth and happiness.

Karin


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