In response to Covid-19’s effect on the economy, Congress enacted and President Trump signed into law the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) on March 27, 2020. The CARES Act was filled with many provisions providing relief to both businesses and individuals who may be facing particularly difficult financial hardships at this time. One of such provisions is the temporary suspension of individuals having to take minimum required distributions (“MRDs”) from their qualified retirement plans or Individual Retirement Accounts (“IRAs”) during 2020.
Pre-CARES Act RMD Rules
Prior to the passage of the CARES Act, any individual who owned a defined contribution qualified retirement plan (such as a 401k or 403b) or an IRA was required to start taking out MRDs after they reached the required beginning date (“RBD”). Under the Setting Up Every Community for Retirement Enhancement Act (“SECURE Act”) passed in December of 2019, the RBD for any distributions after December 31, 2019 is April 1 of the year following the year in which the plan participant turns 72 or retires if still working, the retirement plan is an employer sponsored plan such as a 401k, and the participant is less than a 5% owner of the company sponsoring the plan.
In addition, under the SECURE Act, if an individual plan participant passed away before his or her RBD, the beneficiary receiving that retirement account or IRA would be required to take out all of the funds in that account before the end of the calendar year that is five years of the participant’s date of passing unless the beneficiary was a designated beneficiary (in which case it must be taken out within ten years of the participant’s date of passing) or an eligible designated beneficiary (in which case it may be taken out over a time period based on the beneficiary’s life expectancy). A fairly typical example of a beneficiary who must use this “5-year rule” is an individual plan participant’s estate when he or she fails to update beneficiary designations. A surviving spouse (who would be an eligible designated beneficiary) of a deceased retirement plan or IRA owner who died before his or her RBD may delay taking MRDs until the date the deceased individual’s RBD would have been had he or she been alive.
Interestingly, the RBD of 72 years of age was only recently increased from age 70 and ½ under the SECURE Act. The change under the SECURE was very helpful for allowing plan participants to hold out their retirement accounts or IRAs a little longer to defer taxes and obtain greater growth in those accounts.
CARES Act on MRD Rules
In an effort to provide relief to individual taxpayers, the CARES Act has temporarily suspended any MRDs for year 2020 for most defined contribution qualified retirement accounts and IRAs. This does not apply to defined benefit retirement plans. This includes individuals that were already taking MRDs, individuals that were due to begin taking MRDs in 2020, and beneficiaries of retirement accounts. This is important for a number of reasons, the first being the fact that individuals are not going to be required to take out and pay taxes on these funds in 2020 and can let these retirement accounts grow untouched. Likewise, if an individual found themselves just missing the cutoff under the SECURE Act for being eligible to defer MRDs until age 72, this will allow for a year delay during 2020. If a plan participant has already taken out MRDs for 2020, he or she will be allowed to recontribute that amount back into the plan, BUT a beneficiary will generally not be allowed to do so. It is also important to remember that if an individual needs the funds and is over the applicable age or inherited the account, he or she may withdraw an amount voluntarily at any time.
In addition, for any beneficiary that is not a designated or eligible designated beneficiary (as defined in the SECURE Act) or is currently taking out distributions from an inherited retirement account or IRA under the 5-year rule, year 2020 will not count as one of the five years. Therefore, for any individual who passed away between 2015 and 2019 who left retirement benefits subject to the 5-year rule, year 2020 will not apply as one of the five years. The beneficiary will be able to benefit by either deferring taxes an additional year, spreading the distributions out over an additional year to lessen the tax burden in a single year, or allow for the retirement account or IRA to obtain further growth. It is important to note that this provision in the CARES Act would likely not apply to someone passing away in 2020 as the five years for distributions would be 2021-2025. Likewise, this provision would not apply to beneficiaries subject to the 10-year rule as the SECURE Act specifies the 10-year rule only applies to individuals passing away with retirement benefits after and not including 2019.
While the CARES Act only provides a one year temporary relief when it comes to MRDs, the suspension of the requirement for MRDs is still a huge benefit for individuals subject to taking MRDs. It will be important for practitioners and financial service providers to talk to their clients about the potential impact and planning opportunities that may arise from this 2020 MRD suspension.
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