The highly contagious COVID-19 pandemic has spread around the world like wildfire, bringing with it massive interruptions to all aspects of society. Retired individuals may be faced with an uncertain future as to whether they must take their required minimum distribution from their IRA or 401(k) account this year which may not be the greatest idea with the dip in the financial markets. At the Tax Law Offices of David W. Klasing, our experienced tax attorneys can help guide you through the way your retirement fund obligations are impacted by Covid-19 and the congressional response to it.
Those with IRA or 401(k) retirement accounts are required to withdraw a certain amount of money each year once they reach the age of 70.5 (or 72 if their 70th birthday falls on July 1, 2019 or later). This is known as your required minimum distribution (RMD). Your RMD will vary depending on many factors, including your income level and the amount in your account.
Unless you meet some exception, however, you ordinarily must make this withdrawal by April 1st of the year following the year you first reach the qualifying age, and by December 31st every year thereafter. You will also be responsible for paying income taxes on your RMD. If you fail to take out your RMD, you will be penalized for it by the IRS. The typical penalty is 50% of what you were supposed to withdraw plus back taxes on the full amount that was supposed to be withdrawn.
The Cares Act, more commonly known as the coronavirus stimulus bill, was passed by Congress in March 2020 in response to the massive economic upheaval caused by the pandemic. This huge bill contained all sorts of provisions, including many different components of tax relief considering the economic impacts of the worldwide public health crisis. One provision Congress saw fit to include was a waiver of the required minimum distribution requirements for the 2020 tax year.
This means that for 2020, individuals above the required age will be permitted not to withdraw any money from their IRA or 401k accounts without any penalty being assessed. This allows for a greater amount of flexibility for those who want to wait until the pandemic has passed and their portfolio has recovered before withdrawing money from the account. Note that you are still allowed to take the RMD, and many people will, you just no longer are required to this year.
A quirk of this situation involves those who turned the required age last year and have not made their 2019 withdrawal by April 1st, 2020 as required. If you fall into this category, you will be able to skip the RMD in both 2019 and 2020. Conversely, if you have already withdrawn your RMD for 2020, you will not be able to get the distribution rescinded.
However, an experienced tax lawyer like those at the Tax Law Offices of David W. Klasing may be able to advise you on how to treat the distribution as a “rollover” and return it to the account without tax consequences if it has been 60 days or less since the withdrawal. Be aware that you are allowed only one rollover within each 12-month period. Also note that, although inherited IRAs can take advantage of the RMD suspension for 2020, they are not eligible for the indirect rollovers within sixty days.
Typically, those who withdraw money from their IRA or 401(k) accounts prior to age 59.5 are subject to a 10% early withdrawal penalty tax in addition to what you would normally owe in income taxes on the amount distributed. However, the CARES Act contains a provision allowing Americans under 59.5 with retirement accounts who have impacted by the coronavirus to take out up to $100,000 from their IRA or 401(k) accounts this year without this penalty being assessed. Furthermore, you will not be required to pay income taxes on this money all at once, as the taxable distribution will be spread out over 3 years. If you choose to, you will also be allowed to pay the money back with 3 years and not have to pay any taxes on it.
You may be able to treat RMDs taken out before the waiver was announced as withdrawals under this section so that you can pay them back without being assessed any taxes. This area of the law is still unclear, as the text of the law only refers to allowing those who make early withdrawals prior to age 59.5 to pay them back in 3 years tax and interest-free. An experienced tax lawyer like those at the Tax Law Offices of David W. Klasing can help determine if you might be well served by attempting to reclassify your RMD withdrawal in this manner.
Those who have not already withdrawn their RMD for 2020 and who want to take advantage of the special exception should act quickly to file the necessary paperwork and stop any automatic withdrawals from occurring. At the Tax Law Offices of David W. Klasing, our skilled tax professionals can help you navigate this situation and figure out what the best move is for your finances. To schedule a confidential consultation, call us today at (800) 681-1295.
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