The 2020 RMD Waiver and How it May Affect Your Retirement Plan

Published on July 2, 2020

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.