Required Minimum Distributions

The Coronavirus pandemic of 2020 has affected everyone. There is no one left untouched one way or another by these historic times. Among those perhaps most financially unnerved are those in retirement living on their lifetime savings and now wondering if they have enough to sustain retirement. There have been several recent legislative tax changes to the retirement landscape that retirees need to know in order preserve their accounts.

SECURE Act

In late 2019 President Trump signed the SECURE Act which made a number of changes to the treatment of and planning around retirement accounts. One of the changes that will affect many retirement account owners is the delay of required withdrawals. Retirement account holders benefit from tax deductible contributions and tax deferred growth in retirement accounts, but the tax system does not allow these benefits to continue indefinitely. The system historically subjected retirement accounts to required minimum distributions (RMDs) once the account holder reaches age 70½. The SECURE Act postponed these RMDs until the year the account holder attains age 72. This change was slated to begin in 2020 but as we will see under the CARES Act it will not actually take effect until 2021.

CARES Act

In response to the current pandemic, Congress worked quickly to pass the CARES Act which is an expansive piece of legislation valued at north of $2 trillion. Many of the CARES Act changes are focused on keeping small businesses afloat and keeping employees employed, but Congress did not forget about retirees.

The CARES Act suspends required minimum distributions for 2020 for traditional IRAs, SEP IRAs, SIMPLE IRAs, 401(k)s, 403(b)s, and Governmental 457(b) plans. Owners of these accounts will not be required to take any withdrawals in 2020. Notably defined benefit plans are not included in this provision and therefore are still subject to 2020 required minimum distributions.

One of the main reasons for suspension of 2020 RMDs is that RMDs are based on the account balance as of December 31st of the previous year. Congress did not want to force retirement account distributions based on December 2019 with the market having fallen 24.2% between the end of 2019 and the day the CARES Act was passed. This introduces multiple options for retirees looking at their accounts for 2020.

Option #1: Leave It Alone

Retirees who have sufficient assets to live on outside of their retirement account should consider forgoing their 2020 RMD entirely. Leaving the account fully invested will enable any future recovery to be tax deferred inside of the retirement account wrapper.

Option #2: Maintain Normal Course and Speed

For others, these retirement accounts represent the vast majority of the household assets and are needed to live on each and every year. Those that already take distributions in excess of RMDs will likely already have sufficient cash or short-term bonds in the retirement account to fund upcoming distributions. While you might not be able to forgo 2020 distributions, consider leaving equity holdings invested to the extent possible to allow for maximum recovery inside of the tax-advantaged account.

Option #3: Give It Away

How do these changes effect Qualified Charitable Distributions (QCDs)? QCDs are donations directly from an IRA to a public charity. The portion of a retirement account distribution given to charity is not included in income but still counts toward that year’s required minimum distribution. QCDs are a great strategy that reduces Adjusted Gross Income (AGI) which can save the taxpayer on additional Medicare premiums, the 3.8% Net Investment Income Tax, and many more tax attributes tied to AGI.

Retirees should consider forgoing any 2020 QCDs and perhaps double their originally planned 2021 QCD. If making charitable contributions in 2020 is a priority, the IRA holder should determine whether they expect to itemize and would benefit from making gifts outside of their IRA. If the taxpayer’s itemized deductions will not exceed their standard deduction, donations made outside of their IRA will yield no tax benefit and (if making 2020 donations is a priority) those donations should be made via a QCD.

That being said, the idea is that to the extent possible, retirees should leave retirement accounts untapped during 2020 to maximize the re-growth of the investments inside. Keep in mind when looking at doubling 2021 that QCDs are capped at $100,000 annually per individual. In the case of a married couple both spouses can make up to $100,000 of QCDs from their respective retirement accounts.

Takeaways

The CARES Act makes available the opportunity to leave retirement accounts invested inside of the tax-deferred wrapper by forgoing any 2020 RMDs while market prices are depressed. You and your advisor should take time to re-evaluate your 2020 distribution schedule in light of these recent changes to make sure your distribution and charitable giving plan fits with your goals and your personal tax situation.