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New Rules for 2020 RMDs

There are two recently enacted laws which affect required minimum distributions (RMDs) from traditional IRAs, 401(k)s, and many other qualified retirement plans for 2020.

The first law, the Setting Every Community Up for Retirement Enhancement (SECURE) Act, was passed in December of 2019. This law increased the age for which RMDs must begin from 70 ½ to 72 beginning in 2020.

The second law, the Coronavirus Aid, Relief, and Economic Security (CARES) Act, was passed in March of 2020. This law waived the need for RMDs to begin in 2020 altogether, including for those who inherited retirement accounts.

To sum up the effects of the combined laws:

  • If you were 70 ½ or older by the end of 2019, your RMDs skip 2020 and will resume in 2021.

  • If you had not turned 70 ½ by the end of 2019, you RMDs will not be due until April 1st of the year after you turn 72.

While you should absolutely take distributions as needed to cover the costs of living, you now have the ability to leave the money in your account for 2020, effectively reducing your 2020 taxable income. In addition, utilizing the RMD waiver may help avoid selling investments which have lost value during the economic crisis that followed COVID-19.

Those short-term benefits should be weighed against long-term effects of not taking a distribution, such as the potential increase to future RMDs by having to distribute the same account balance over a period of time now shortened by one year. It may also make sense to take a small distribution in 2020 if it means maxing out a lower tax bracket that could be unavailable in the next year due to anticipated higher taxable income.

One last consideration involves Qualified Charitable Distribution (QCDs). These distributions can count as part of/all your RMD in any given year if they are directly from a qualified retirement account to a qualified charity. The main benefits of QCDs are fulfilling your RMD while not increasing your taxable income and being able to benefit from charitable donations even when taking the standard deduction. In 2020, you can still make a QCD but it would not provide the benefit of lowering your taxable income. The benefit would be in reducing the account balance for the long-term potential of helping lower your upcoming RMDs.

Make sure to consult with your trusted tax advisor before the end of year regarding RMDs, QCDs, and the many other changes on the tax landscape for 2020.

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