Estate Planning Essentials: Required Minimum Distributions Suspended during the COVID-19 Outbreak and More New Rules You Need to Know
The Coronavirus outbreak has shaken the world. Financial planning and estate planning have become a central focus for those concerned that they, or someone they care for, will contract the virus and—potentially—lose control of their affairs.
Many clients’ largest asset are their IRAs and 401(k)s. For years, when someone turned 70 ½, they would be forced to take a distribution from their IRA / 401(k) and pay taxes on that distribution—even if they didn’t want that money. This event is known as a Required Minimum Distribution (RMD). It’s a way for the government to raise revenue. In December of 2019, much to the pleasure of taxpayers, that age of 70 ½ was shifted to 72, under the SECURE Act.
In March 2020, the CARES Act was passed to help relieve against the economic damage caused by COVID-19 and social distancing.
Here is a summary of these changes and how they could affect you.
No Required Minimum Distributions for 2020.
This year, you can skip taking the RMD from your retirement accounts. Yes, even if you are 72 or older. This includes RMDs from IRA, 401(k), 403(b), and 457(b) plans. Of course, you can take a distribution, but it is probably smart to delay until next year, if you can. The markets are at their lowest point in a couple years—it isn’t ideal to cash out when the markets this low.
By next year we will likely recover, and it will be a better time to liquidate. For a more specific analysis, consult your financial advisor.
What if I already took my RMD in 2020?
If you have already taken your required minimum distributions this year, you are likely out of luck. The government did not highlight a way to “return” your RMD to your account. Still, a qualified financial advisor may able to utilize a rollover strategy to save taxes.
No Penalty for Early IRA Distributions.
In normal times, if you take money from an IRA or 401(k) before you are 59 ½, you will pay a 10% penalty—in addition to the income tax you would normally pay on that distribution. For 2020, you can take out up to $100,000 from these accounts without paying the 10% penalty.
If you elect to take an early distribution, you can spread your income tax hit over three years; however, if 2020 is a low-income year for you, you can elect to pay the entire tax this year. You may also pay back the entire amount you withdraw over those three years and not pay any taxes. Keep in mind, you should not take early distributions from these accounts unless you absolutely need to—you will miss out on years if not decades of compound growth.
One more note: To be eligible for this penalty free distribution, you or your spouse need to experience “adverse financial consequences” such as being quarantined, laid off, furloughed, or have childcare issues. This is a broad standard, but a standard nonetheless.
What if you inherited an IRA? Inheritors get one year off. If you inherited in 2019 or before, you generally use your life expectancy as the table for measuring your RMD. If you inherited the IRA in 2020 (After the implementation of the SECURE Act), you generally had ten years to pull out your money. The CARES Act shifted this rule so that no RMD must be taken in 2020—even on inherited IRAs.
If you’ve inherited a Traditional IRA post-SECURE Act, make an appointment with CunninghamLegal to discuss spreading your tax hit over the upcoming years. If you’ve inherited a Roth IRA post-SECURE Act, it generally makes sense to hold the money in the account until the final year—to take advantage of that compounding.
Consider taking a smaller distribution than normal.
The CARES Act was designed to take pressure off Americans and our financial system during these difficult times. Congress has allowed citizens to suspend RMDs. This is a major move and all clients should consider taking a smaller distribution than normal this year if they can. This will allow investments to continue to grow tax free and also avoid the need to pay tax during this crisis.
CunninghamLegal offers video conferencing and telephone appointments to ensure that each client is up to date. As you know, we are busy during this time, but we are trying to meet with as many clients as possible.
We are even able to help people prepare estate plans without any face to face meeting.
Schedule a phone or virtual meeting meeting with us here. We wish you and your family the best during this time. Please pass this information on to anyone who you think can benefit.