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    Required Minimum Distributions During 2020

    Submitted by Richard Allen, EA, AFSP

    Two major laws were enacted in the last few months which significantly affect Required Minimum Distributions (RMDs) and retirement planning overall. There were the SECURE Act (Setting Every Community Up for Retirement Enhancement) signed December 20, 2019 and the CARES Act (Coronavirus Aid, Relief, and Economic Security) signed March 27, 2010.
    These changes significantly affect nearly all retirement distributions which:
    1. have been overlooked for 2019,
    2. have been made in 2020,
    3. will be made later in 2020,
    4. which can be returned by to the retirement plan on or before July 15, 2020,
    5. which may be skipped for 2020,
    6. which may be made in the future after the primary owner dies, or
    7. which may be taxed at significantly higher tax rates due to current emergency deficits.

    NOTE: Some items are beyond the scope of this short discussion. Items like trust beneficiaries, assets appropriate to taxpayer risk tolerance, and other family assets, including long term care coverage. IRS Publication 575 Pensions and Annuity Income, and Publication 590-B Distributions from Individual Retirement Accounts cover many details.

    Many taxpayers completely overlook nuances about RMDs. Many taxpayers just assume they should only consider taking out the calculated RMD. Very many times they should consider other options. Let’s talk further about the 7 situations mentioned above.
    1. Prior to 2020, retirees who have reached age 70 ½ in 2019 and before had to takeout RMDs for 2019. Most beneficiaries of retirees had to follow the expected payout rules which applied to the original retirees. I frequently meet clients over age 70 ½ who have overlooked taking a RMD. There is a 50% IRS penalty for not taking out RMDs. When the situation is noticed, the taxpayer should immediately take out the missed distribution based on the original determination. Withhold federal income taxes. Generally, do not prepare Form 5329 to show the potential penalty. Instead, if the taxpayer later receives an IRS notice about the missed distribution, show the IRS the papers for the late distribution and ask for a waiver of the penalty due to whatever circumstances caused the taxpayer to overlook the original distribution (generally, it will be taxpayer health or family emergency issues).

    2. The CARES Act temporarily suspended RMDs – just for the year 2020. What if the taxpayer has already taken out a RMD for 2020, and the taxpayer would like to consider putting it back? If this was from an IRA a taxpayer generally has a 60 day time frame to put an entire withdrawal (or even a portion of it) back in a IRA (this would include the federal taxes withheld) under typical IRA rollover rules. (Such a rollover is only allowed just once a year to a taxpayer.) IRS Notice 2020-23 (dated April 9 2020) allows a taxpayer who had received a distribution between February 1 and May 14, 2020 to return the rollover on or before July 15 2020. (For taxpayers who made a distribution in January 2020 the 60 day rollover period had already expired.)

    3. Taxpayers who had reached and 70 ½ in 2019 or before, would ordinarily have to take out an RMD for 2020. As just mentioned, the CARES Act temporarily suspended RMDs – just for the year 2020. There are several reason why someone might want to consider taking a 2020 RMD (or even more).

    a. If a taxpayer is married and there are substantial retirement assets between the spouses, they may save a lot of current and future taxes by taking out greater distributions while both taxpayers are still alive. Eventually, one of the married taxpayers will pass away first, leaving the survivor as a single taxpayer with smaller standard deductions, and narrower income tax brackets.
    b. This same consideration applies if the taxpayers are at least age 59 ½. They could start taking out retirement distributions without the 10% early distribution penalty to reduce eventual taxes in later years.
    c. Taxpayers of any age can consider a partial rollover from a traditional IRA or other retirement account to a Roth IRA or Roth retirement account. Such a rollover would also not have a 10% early withdrawal penalty and could eventually save future taxes due to the tax-free Roth compounding.

    4. As previously mentioned in item 2 above, distributions received on or after February 1 2020 can be returned to an IRA, or other retirement account. To maximize tax savings, the taxpayer would need to add back the federal withholding. The taxpayer would later get the federal withholding back when a 2020 return is filed.

    5. A taxpayer with substantial assets may consider withdrawing a distribution in excess of the RMD, or a distribution after age 59 ½ (which would not be subject to a 10% early withdrawal penalty). This might minimize future income taxes on withdrawals. (See item 2 above.) Another reason for doing this is to take withdrawals not needed for living expenses, pay applicable federal taxes, and put the balance in a brokerage-type account. There are additional reasons for doing this:

    a. Investments in a brokerage account generally have lower taxes on ordinary dividends and long term capital gains. Investments inside a Traditional IRA, or most other non-Roth retirement accounts will eventually be tax at higher ordinary income tax rates.
    b. In addition, assets in a brokerage account that are inherited generally received a stepped up basis avoiding capital gains within that original brokerage account.

    6. The SECURE Act changes the taxation of most retirement plans received after the taxpayer dies. Starting with deaths in 2020, the entire retirement account must generally be distributed by the end of the 10th year after the taxpayer’s death. This new rule applies to many “Non-Eligible Beneficiaries.” “Eligible Beneficiaries” include spouses, minor children under the age of majority, chronically ill persons, certain trusts, and other beneficiaries no more than 10 years younger than the original taxpayer. Those Eligible Beneficiaries may still follow the pre-2020 distribution rules. Non-Eligible Beneficiaries will need to take out their inherited portion with investment income by the end of the 10th year after the taxpayer’s death. This could push the beneficiary into a significantly higher tax brackets.

    7. The current tax rates and standard deductions are under the Tax-Cuts & Jobs Act enacted in 2017. These special rules end after the calendar year 2025. Starting with 2016, the rates and deductions return to their 2017 levels. However, the current Covid-19 emergency expenditures are creating significant deficits which might cause tax changes to be enacted before 2025, or such tax increase changes could be applied to 2026 and later years. These future rates and rules are unpredictable.

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