The RMD Pass Play – Is it in Your Game Plan?

2020 was supposed to bring with it “perfect vision” (get it)… and what a year it was going to be, and then, well, you know, when you’re busy making plans, life happens!

Part of what was ushered in at the beginning of the year was some of the most significant changes to IRAs and retirement fund activity in quite some time. The Consolidated Appropriations Act of 2020 included a number of key IRA changes, all of which are effective in 2020. Most were part of the broader SECURE Act expanding coverage for retirement plan participation, facilitating lifetime savings, and increasing access to retirement funds.

For IRA owners, the required minimum distribution changes will spark reconsideration of various estate planning techniques and revised beneficiary designation elections, as current beneficiary designations (and the various trust vehicles) could well upset existing estate plans—which will no longer have the intended results.

For my money, the Big 3 (Celtics reference) impactful items are:

1. The Elimination of the Stretch IRA – Post-Death RMDs Accelerated

Prior to the SECURE Act, in general, the rules permitted distributions to be paid over the designated beneficiary’s life expectancy (so-called stretch IRAs).

In the “New Rules” distributions after the death of the IRA owner must be made by the end of the tenth calendar year following the year of death. However, payments can be made over the beneficiary’s life expectancy, if the beneficiary is (1) a surviving spouse, (2) a disabled or chronically ill individual (or certain trusts for such persons), (3) a beneficiary no more than ten years younger than the IRA owner, or (4) a minor child of the IRA owner (generally, until the child reaches majority).

This change will significantly impact your Estate and legacy planning.

2. Eliminate Age Limit on IRA Contributions (and Deductions)

Previously, regular contributions to a traditional IRA could not be made once the IRA owner reached age 70 ½ (and no deductions were allowed).

Now, there is no longer an age limit on traditional IRA contributions, nor an age limit on deductions for such contributions.

So, if you keep working, you can keep deferring into your IRA products.

3. Lifetime Minimum Required Distributions Delayed

We all know the rule that was in place… turn 70 ½ and you are “required” to take minimum distributions tied to your account balance(s) and life expectancy on a chart (kind of morbid). Noted: there are a few twists and turns here with the first year and dates.

With the SECURE Act – Age 70 ½ is replaced with age 72. BOOM! A notable exception and throwback to the “old” rules is the QCDs (Qualified Charitable Deductions) where the distributions go straight to a charity, can still occur at age 70 ½ (not a day before) and be omitted from income. Up to $100,000 per year.

A Close runner up to the “Top 3” include:

Tax Relief for Withdrawals for Childbirth and Adoption Expenses up to $5,000 incurred within a year following birth or legal adoption are not subject to the 10% additional early withdrawal penalty.

As we noted, when we’re busy making plans, life happens, and sometimes not what we were expecting… enter COVID and the CARES Act.

The Coronavirus Aid, Relief, and Economic Security (CARES) Act allows those subject to RMDs in 2020 to essentially skip them… as the Patriots say… “We’re on to 2021”

How could this be beneficial to you:

It could be beneficial because as the RMD increases taxable income it is subject to income taxes at your marginal rates. So “skipping” the distribution omits it from taxable income and while invested in the qualified plan (IRA, 401k, etc) the assets are allowed to grow tax-deferred which accelerates their growth (provided the markets are moving up!). That’s a win/win.

In addition, the stimulus payment granted by the CARES Act were tied to Adjusted Gross Income – the payment was issued based upon this income in 2018 and/or 2019 but was really an advance credit on your 2020 taxes. If by suspending (or even just reducing) your RMD in 2020 you could dip below the threshold, you may be able to trigger the receipt of the stimulus payment.

Both of these require an analysis of your particular set of facts and circumstances. Tax planning will be at the heart of these decisions and will need to consider the present and the future (you know there is an election coming that may have something to do with tax rates right…?).

Once you’ve planned and decided, I’m not sure as to the behavior of the investment houses so if you wanted to suspend your 2020 RMD I would certainly communicate that to them – reversing an RMD is akin to putting toothpaste back in the tube.

In addition to the planning considerations above, the CARES Act has allowances for “need” based withdrawals. If you find you need (the key being need) money out of your retirement accounts, you have the option to take funds from your IRA. Then, when your situation improves, you have options and can determine what is most appropriate: recontribute or pay taxes ratably.

Now you are the expert. Let me know if you have any follow up questions.

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