COVID-19 has had a devastating impact on the lives of many individuals both physically and financially. In response to this pandemic, Congress recently passed and the President signed into law the Coronavirus Aid, Relief and Economic Security Act or CARES Act. While this legislation and stimulus package is intended to help individuals and businesses in many ways, there are several provisions related to retirement planning which provide opportunities to help address the negative impact of the pandemic on individuals, particularly the economic and financial effects. The following represents a couple of these important changes to retirement plans resulting from this CARES Act.
One significant change relates to those individuals currently subject to the Required Minimum Distribution “RMD” rules. The CARES Act has provided a waiver of these distributions or RMD’s in 2020.
This applies to traditional Individual Retirement Accounts “IRA’s” and workplace retirement plans, such as:
- Simplified Employee Pension or SEP IRA’s
- SIMPLE IRA’s
- 401(k) Plans
- 403(b) Plans
- 457b) Plans
- Inherited IRA’s
It does not apply to Defined Benefit Plans
Also, for those wishing to convert to a Roth, there is no requirement to take your RMD first before conversion in 2020
A second significant change to retirement plans resulting from the CARES Act relates to providing individuals an opportunity to rollover or return their RMD in the event they’ve already taken it in 2020.
- Generally RMD’s are not eligible for rollovers, subject to certain exceptions, one being that you’re still working
- Because there is no RMD requirement in 2020, any RMD is voluntary
- These Rollover distributions typically have a 60 day rule wherein the rollover must be completed within 60 days of the distribution in order to avoid tax implications
- The CARES Act has provided an exception and extension to the 60 day Rollover rule such that anyone who has taken an RMD between February 1st and May 15th has until July 15th in 2020 to complete this rollover with no tax implications
- This 60 day Rollover rule exception does not apply to Inherited IRA’s
Given what’s been going on in the investment markets since the beginning of the year, with some markets down more than 20% and RMD calculations based on December 31, 2019 valuations, this may offer an excellent opportunity to rollover the RMD and give these funds a chance to grow and recover tax deferred until 2021. This would be particularly relevant for an individual not needing these funds. This point also applies to the opportunity to waive any RMD in 2020 and thus let these funds continue to grow tax deferred until 2021.
We hope you find this information useful. There are other important changes to retirement planning resulting from the CARES Act as well as the SECURE Act which we will highlight in coming communications.