The 2020 RMD Waiver and How it May Affect Your Retirement Plan
The CARES Act (or the Coronavirus Aid, Relief, and Economic Security Act) was an enormous piece of legislation enacted in March 2020 in response to the COVID-19 pandemic. It was designed to mitigate the effects that lockdown and lost business (and wages) were having on employers and employees. Its passage was preceded by the SECURE Act (Setting Every Community Up for Retirement) in late December 2019. Both brought many changes to retirement plan design, participation, and administration.
Waiving the requirement for required minimum distributions
One change concerns the 2020 required minimum distribution (RMD) that retirement account owners or participants historically had to withdraw upon reaching age 70½ .These distributions must be taken for Traditional IRAs, SIMPLE IRAs, SEP IRAs, rollover IRAs, and most 401(k) and 403(b) plans. RMDs do not apply to Roth IRAs unless it is an inherited IRA.
However, for 2020, the CARES Act waives RMDs. Even if you’d already been taking this distribution, you no longer have to do so in 2020 (which enables you to keep those funds in a tax-advantaged retirement plan for continued investment and growth).
Here are some other updates regarding RMD regulations:
- RMDs are also waived in 2020 for inherited IRAs.
- This waiver is temporary; account owners and participants must resume or start RMD payments in 2021.
- The waiver also applies to people who turned 70½ in 2019 and did not take their first RMD before January 1 of this year. (One usually has a three-month extension until April 1 of the following year to take the very first RMD; otherwise, the deadline is always December 31 of the tax year.)
Additional RMD updates:
- The SECURE Act increased the age at which an individual must begin taking RMDs to 72 beginning in 2020. Therefore, investors who haven’t yet crossed that 70½-year-old mark now have more time to allow their retirement funds to be invested and grow in a tax-advantaged retirement plan.
- Since any distribution in 2020 is no longer seen as an RMD, it can be converted to a Roth IRA, which was prohibited before COVID-19.
- Eligible individuals who took a distribution this year that was not treated as an RMD (due to the waiver) may roll over those funds to another eligible retirement plan or to an IRA within 60 days of the distribution.
- The IRS has extended the 60-day rollover deadline to allow most individuals until July 15, 2020 to do so.
- For beneficiaries taking distributions over a five-year period, 2020 is disregarded and one year is added to the remaining period to distribute inherited assets.
As with any retirement plan and investment, individuals are encouraged to consult their trusted advisor or tax professional to work out the best way to handle their required minimum distributions—whether to take advantage of this year’s waiver, do a rollover, or wait until age 72 to begin, depending on your age and situation. If you have a qualified retirement plan through work, check with the plan administrator about your options.
RMDs and self-directed retirement plans
The RMD waivers and updated provisions concerning these distributions apply to self-directed retirement plans as well. And, with the age increase for taking these distributions, self-directed investors with alternative assets within their plans have the potential to accrue more retirement income from real estate, precious metals, private equity, and many more nontraditional investments these plans allow. There is also now a longer time horizon for using self-directed funds for unsecured or secured loans, which are other popular ways to invest through a self-directed IRA.
The professionals at Next Generation are available to help you calculate your RMD when you’re ready—whether in 2020 or in the future—and will handle all the tax reporting and administration associated with your self-directed IRA. If you have questions about RMDs or about self-direction as a retirement wealth-building strategy, you can schedule a complimentary educational session. To connect with our team directly, call Next Generation at 888.857.8058 or email us at NewAccounts@NextGenerationTrust.com.
Considering Taking a Hardship Distribution from Your Retirement Plan?
The coronavirus pandemic is leaving millions of Americans on furlough or out of a job, dealing with reduced hours or workload… but NOT with reduced monthly bills to pay. For many, this is a time of financial hardship. Sadly, according to a 2018 Federal Reserve report, 40 percent of adults cannot cover a $400 emergency expense and the current situation goes far beyond that.
Sometimes, individuals consider dipping into one’s retirement plan to cover short-term expenses. Among the emergency expenses that may qualify for such a withdrawal are tuition/education expenses; down payment or repairs on a primary residence, rent or mortgage payments (to thwart possible eviction or foreclosure); out-of-pocket medical expenses; and funeral costs.
- The withdrawal amount has been limited to the amount of the emergency expense
- The plan participant pays income tax on the withdrawal plus a 10 percent penalty if under 59½ years old
- If a 401(k) design allows for loans (not all do), people taking loans against their 401(k) plans must repay the full loan amount with interest; lack of repayment can trigger additional penalties
- In addition, participants’ contributions from their paychecks into their 401(k) plans are suspended for at least six months after taking the hardship distribution
Changes with the CARES Act
This stimulus package has loosened the rules around taking hardship withdrawals from retirement plans, and loans from 401(k) plans. A CARES Act provision allows individuals who are facing adverse financial consequences due to COVID-19 to withdraw funds from their retirement accounts without penalty (regardless of age). This applies to IRAs and 401(k) plans.
The withdrawal must be made before December 31, 2020 and can be up to $100,000. Tax payments on this income are extended out three years. For those taking loans against their 401(k)s, that amount is also raised to $100,000. Note that there are no loans from IRAs.
Why gamble with your retirement savings?
Many financial experts argue against taking out a hardship loan from one’s 401(k) plan to avoid reducing any retirement savings, when there are other loan options available (such as a home equity loan, SBA loan, or other lines of credit). And, all good intentions aside, it may be difficult to replace the funds from a hardship distribution from an IRA or other retirement plan—and then rebuild on that money for retirement.On top of that, the stock market has suffered a tremendous downturn, with subsequent volatility almost daily, as a result of COVID-19 and the economic stressors stemming from lockdowns.
Weathering market volatility through self-direction
Self-directed investors have greater leeway when it comes to hedging against that stock market volatility. That’s because of the many alternative assets that can be held in a self-directed retirement plan. Investing in real estate, precious metals, private equity, or other non-publicly traded assets give savvy investors many more ways to build a more diverse retirement portfolio that have stronger potential to weather the COVID-19 storm (and other times of economic uncertainty). One reason is because the returns on nontraditional investments in a self-directed IRA do NOT directly correlate with stock market returns.
You can even loan funds from your self-directed IRA to someone who is dealing with a cash flow shortage, with the terms worked out between both parties, and receive interest and principal paid back to your IRA.
As always, it is best to consult your trusted financial adviser about how to navigate financial hardship as it relates to your retirement plan. At Next Generation, we’re here to answer any questions you have about self-direction as a retirement strategy, or about the many alternative assets allowed in these plans. You can schedule a complimentary educational session to learn more or contact us directly via phone at 888.857.8058 or email NewAccounts@NextGenerationTrust.com.