IRS Waives Required Minimum Distributions (RMD) from Retirement Accounts for 2020

The Coronavirus Aid, Relief, and Economic Security (“CARES”) Act, which became law on May 27, 2020, waives the requirement that taxpayers take required minimum distributions (“RMDs”) for 2020 from IRAs. According to Notice 2020-51 recently issued by the IRS, taxpayers who already took 2020 RMDs may be able to return them to their IRA accounts and avoid paying income tax on the distributions. The timing, however, is critical.

RMDs are minimum annual distributions that the IRS requires taxpayers to begin taking from their qualified retirement accounts after they turn a specified age. Previously that age was 70½, which was changed to age 72 by the SECURE Act enacted on December 20, 2019. Normally, taxpayers must begin taking RMDs by April 1 of the year following the year in which they reach the specified age. The CARES Act waives this requirement for 2020, including 2020 RMDs and 2019 RMDs that were required to be taken by April 1, 2020.

However, the CARES Act created three issues surrounding RMDs:

  1. Under current tax law, IRA owners are generally allowed to withdraw funds from an IRA account for up to 60 days without incurring tax liability. As long as the funds are returned to that account or rolled over to another qualified retirement account within 60 days, the IRA owner pays no tax and no early withdrawal penalty. As indicated above. the CARES Act, which waives required RMDs for 2020, became law at the end of March 2020. By that time, many people had already taken their RMDs for 2020 and were outside the 60-day rollover window. The CARES Act did extend the 60-day rollover window to July 15, 2020 for RMDs taken on February 1st or later. However, it did not apply to RMDs taken in January. Those distributions had no relief under the CARES Act.
  2. Under current tax law, you may only roll over only one IRA distribution in a 12-month period. For taxpayers who already conducted one rollover within the past 12 months, they were prohibited by law from subsequently rolling their RMDs back to the account where it came from or into another qualified retirement account. The CARES Act provided no relief for these taxpayers.
  3. Under current tax law, taxpayers who have inherited IRA accounts other than surviving spouses are prohibited from engaging in any rollovers. For such persons who had not yet taken their 2020 RMDs, the CARES Act eliminated the need to take them. However, for any such person who had already taken his or her 2020 RMD, the CARES Act provided no relief to allow that person to roll those funds back into the IRA account.

IRS Notice 2020-51 states that you now have until August 31, 2020 to rollover all previously distributed 2020 RMDs. This includes RMDs taken in January 2020. It also states that the rollover or repayment of RMDs will not be treated as a rollover for purposes of the one rollover per 12-month period rule. The notice also allows for the rollover of 2020 RMDs withdrawn from any inherited IRA account.

This is good news for those individuals who took RMDs and would like to put them back. By putting them back, you can reduce your current year taxable income and allow the funds to grow tax-deferred for an additional year. However, you need to act by the August 31, 2020 deadline.

If you have any questions about required minimum distributions, call Gregory J. Spadea at 610-521-0604. The Law Offices of Spadea & Associates, LLC prepares tax returns and provides estate and tax planning year-round.

The Setting Every Community Up for Retirement Act of 2019 (SECURE Act)

On December 20, 2019 the President signed into law the Setting Every Community Up for Retirement Act (the SECURE Act) as part of the Further Consolidated Appropriations Act of 2020.   The SECURE Act made various changes to the rules governing retirement benefits.  The key changes are as follows:

Distributions After Death

The most significant changes in the law are that the rules governing required distributions after the death of an employee or IRA owner generally now require that any remaining assets be distributed to the designated beneficiary by the end of the tenth calendar year following the employee or IRA owner’s death. This substantially reduces the benefit of the stretch.

Gold nest egg concept for retirement savings and financial planning

Until now, designated beneficiaries could take distributions over their life expectancy or faster if they wanted. The ability to stretch the distributions over a long period of time provided a substantial income tax benefit.

There are exceptions for spouses, minor children, disabled or chronically ill persons, or persons not more than 10 years younger than the employee or IRA owner.  In addition, withdrawals of up to $5,000 that are used for adoption or childbirth expenses will be exempt for the 10% premature distribution tax for distributions made after 12/31/2019.

These changes are generally effective for persons dying after December 31, 2019.

Traditional IRA Contributions After Age 70 ½

Until now, an individual could not contribute to a traditional IRA if he or she reached age 70 ½ or would reach age 70 ½ by the end of the year for which the contribution is made. Beginning in 2020, this limitation is repealed.

Unlike a traditional IRA, an individual over age 70 ½ is already permitted to contribute to a Roth IRA. However, there are income limits for eligibility to contribute to a Roth IRA. These limits remain in effect.

When Distributions Must Begin

Until now, employees and IRA owners generally had to begin taking distributions at age 70 ½, though they could defer the distribution for the year in which they reach age 70 ½ until April 1 of the following year. However, an employee who is not a 5% owner (with attribution) may defer benefits until retirement; and no distributions are required from a Roth IRA.

The new law increases the age threshold from 70 ½ to 72. This change is effective beginning in 2020 for individuals attaining age 70 ½ after December 31, 2019.

This change benefits some IRA owners who want to do Roth conversions to the extent it will not put them into too high a tax bracket. They will have an additional year or two before they have to take distributions that would be added to their income.

This change also benefits IRA owners who do not need to take distributions from their retirement plans and IRAs. They will be able to accumulate money in their retirement plans and IRAs for a longer period of time.

Planning Considerations

Roth contributions and conversions

It generally makes sense to contribute to a Roth IRA or convert to a Roth IRA to the extent the tax rate on the conversion is less than, equal to, or not too much higher than the tax rate that would otherwise apply to the distributions.

The limitation on the stretch will bunch the distributions after death into a shorter period of time. This generally will result in the distributions being taxable at higher rates.

As a result, Roth contributions and conversions will be much more advantageous than in the past.

Spouses of IRA owners who died within the last nine months

Most married people name their spouse as the primary beneficiary of their retirement benefits. However, under the new law, the surviving spouse’s beneficiaries generally will not be able to stretch the distributions for more than 10 years.

As a result, if an employee or IRA owner died in 2019 within the last nine months, the surviving spouse should consider disclaiming the benefits. In this way, the benefits will pass to the contingent beneficiaries, who may be able to stretch them over their life expectancy under the old law.

Reviewing existing trusts

Many people left their retirement benefits in trust rather than outright for the same reasons they left their other assets in trust rather than outright. By leaving assets in trust, their beneficiaries’ inheritances will not be included in their estates for estate tax purposes and will be better protected against their creditors and Medicaid.

Some people designed their IRA trusts so that any distributions from the IRA to the trust would be paid out to the beneficiary on a current basis. They may have been willing to have the beneficiary receive modest distributions in the early years but may not want the beneficiary to receive the entire amount at the end of 10 years. These trusts should be reviewed, and if appropriate, changed to discretionary trusts.

Charitable remainder trusts

A charitable remainder trust is a possible workaround to replicate the stretch.  A charitable remainder trust distributes a percentage of the trust assets to one or more individuals for life or for a term of up to 20 years, whereupon the trust ends and the balance of the trust assets goes to charity. The distribution percentage must be at least 5%. The client may select the charities.

The payments can be fixed based on the initial value of the trust or may vary based on the value of the trust each year. The actuarial value of the charity’s remainder interest must be at least 10% of the value of the trust as of inception.

Since a charitable remainder trust is tax-exempt except for New Jersey income tax purposes, it can take the benefits in a lump sum without any adverse tax consequences.

Since the individual beneficiaries receive distributions for life or for a fixed term of up to 20 years, the result is similar to that of a stretch.

There are some tradeoffs to a charitable remainder trust. It is less flexible than a traditional trust since the payments may not vary from year to year except based on changes in the value of the trust assets.

The payments to the individual beneficiaries have to be outright. There is an economic cost since the actuarial value of the charity’s interest has to be at least 10% of the value of the trust as of inception. However, for some people, this may be a small price to pay to be able to replicate the stretch.

Increased Penalties for Failure to File Retirement Plan Returns which Applies to Returns, Notices and Statements required to be filed or provided after 12/31/2019

  1. The fee for failure to file form 5500 increased from $25 per day to $250 per day, with the maximum amount per Form increased from $15,000 to $150,000;
  2.  The failure to file form 8955-SSA penalties increased from $1 per day per participant with a maximum penalty of $5,000, and to $10 per day per participant with a maximum penalty up to $50,000;
  3. Notification of withholding of income tax penalties increased from $10 to $100 dollars for each failure, with the maximum being increased from $5,000 to $50,000;
  4. Fees related to failure to report plan name change, name or address change of plan administrator, plan termination or plan merger increased from $1 per day per failure to $10 per day per failure, with the maximum amount being increased from $1,000 to $10,000.

If you have any questions about tax, trust or estate planning call Gregory J. Spadea at 610- 521- 0604.

11 Exceptions Where the IRS May Waive the 60 Day Deadline for IRA Rollovers

Internal Revenue Service sign.

The IRS gives you 60 days to rollover an Individual Retirement Account (IRA) into another IRA or qualified plan. However, if you fail to rollover the IRA in 60 days or fail to qualify for the waiver, the entire distribution will be taxable and you may be subject to an additional 10% penalty if you are under 59½ years old. Fortunately, there are 11 exceptions where the IRS will waive the 60 day rule and give you additional time to make the Rollover contribution. To qualify for the waiver the IRS must not have previously denied a waiver request with respect to a rollover of all or part of the distribution to which the contribution relates. In addition you must submit written certification to a plan administrator or IRA trustee within 30 days after being able to make the rollover contribution. If you miss the 60 day deadline because of one of the 11 reasons listed below the IRS will issue a waiver and allow you to make the rollover contribution beyond the 60 days.

To qualify you must have missed the 60-day deadline because of your inability to complete a rollover due to one or more of the following 11 reasons:

  1. An error was committed by the financial institution making the distribution or receiving the contribution.
  2. The distribution was in the form of a check and the check was misplaced and never cashed.
  3. The distribution was deposited into and remained in an account that you mistakenly thought was a retirement plan or IRA.
  4. Your principal residence was severely damaged.
  5. One of your family members died.
  6. You or one of my family members was seriously ill.
  7. You were incarcerated.
  8. Restrictions were imposed by a foreign country.
  9. A postal error occurred.
  10. The distribution was made on account of an IRS levy and the proceeds of the levy
    have been returned to you.
  11. The party making the distribution delayed providing information that the receiving plan or IRA required to complete the rollover despite your reasonable efforts to obtain the information.

If you missed the 60 day deadline on your IRA rollover and think you qualify under any of the 11 exceptions listed please call Gregory J. Spadea at 610-521-0604.

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