In late March, Congress passed the Coronavirus Aid, Relief and Economic Security (CARES) Act. This $2 trillion dollar package aims to address the financial pressures faced by individuals, businesses, and state / local governments due to the pandemic. You have probably heard a few things about the CARES Act already. Here, it’s our aim to answer questions around how it impacts your IRA.
Do I have to take my required distribution this year?
No. This is a major change for many IRA owners. If you owned an IRA and were over 70.5 by January 1, 2020, you have been taking required minimum distributions (RMD’s) from that IRA. This year, you have the option of skipping it. This applies to inherited IRAs as well. (If you read that and you’re thinking, wait, isn’t the new RMD age 72? It is, it begins for those turning 72 after the 1st of this year. For more info, check out our post on the SECURE Act.)
What should I do?
If you need your RMD for cash-flow purposes, you should, of course, take it. That is what your retirement savings is for.
If you don’t, skipping your required distribution could offer two benefits:
- Leaving the money invested gives your nest egg more time to recover from the recent pullback.
- It would mean a lower taxable income for 2020. This offers up a number of planning opportunities, from Roth conversions, charitable gifting and selling off other appreciated assets. It’s a good time to start looking at your overall picture and discussing your options.
What if I’ve already taken my RMD for the year?
If your RMD was distributed less than 60-days ago, you can complete a 60-day IRA rollover contribution.* Only one 60-day rollover can be completed in any year, and there may be additional clarification on this in the months to come (as there was in 2009 when this wavier was previously offered).
Another tricky piece of a potential rollover is the tax withholding. Tax withholding reversals are generally not allowed by custodians, which means the rollover check you would have to write would be both the amount distributed and the amount withheld for tax, leading to a larger-than-normal refund in 2021.
*the 60-day rollover option is not available to those with non-spousal inherited IRA distributions.
How does this impact my charitable gifting?
Charitably-minded IRA owners often use the qualified charitable distribution (QCD) strategy to accomplish their goals. QCD’s allow you to send your RMD (or some portion of it) directly from your IRA to your 501(c)3 charity of choice, without the IRA dollars hitting your taxable income. The benefit of this has only been exacerbated since the standard deduction doubled and many no longer itemize their deductions.
Even though there is not an RMD this year, you can still gift via QCD (up to $100,000/year). One tax opportunity within this unusual year: you could skip gifting this year and, instead, double your QCD’s in 2021. This could extend the tax benefits of this wavier a bit.
For most, charitable gifting is a way of supporting core values. We realize that the financial support for your organization this year may surpass your desire for tax savings next year.
Can I take money from my IRA even if I’m not 59.5?
You can always access your retirement account money; however, it usually comes with a 10% penalty if you’re under 59.5. The CARES Act has carved out a provision for those of you under 59.5 to withdraw up to $100,000 for a “coronavirus-related need” without facing that early withdrawal penalty.
A coronavirus-related need is defined as:
- Anyone who is diagnosed w/ SARS-Cov-2 or COVID-19 by a test approved by the CDC.
- Anyone whose spouse or dependent was diagnosed.
- Anyone who has experienced adverse financial consequences as a result of being quarantined (furloughed, laid off, work hours reduced, unable to work due to lack of child care due to COVID-19, etc.)
In these cases, you will not face the 10% penalty. The income tax due on the distribution may be spread evenly over 3-years. You also have the option of repaying yourself within a 3-year period.
With all of the strategies above, we highly recommend you consult with your CFP® professional and your tax advisor before determining the best path forward for your unique situation.