Planning Ideas Around Retirement Accounts

Several new planning opportunities have been created by the CARES Act, the SECURE Act and the subsequent IRS guidance related to how these are affected by the extension of the tax deadline.

In this article, we review several of those planning opportunities. If any of the corresponding statements below are relevant to you, click on the link to go to that section.

RMDs: “I have taken or may have to take my required minimum distributions (RMDs) in 2020.”

Access to Funds: “I may need to access funds from my retirement accounts unexpectedly due to this year's economic downturn.”

Roth Conversions: “I might consider doing a Roth conversion in 2020 either because my income is lower than usual, or the values of my traditional IRA have declined.”

 

Section 1: RMDs

“I have taken or may have to take my required minimum distributions (RMDs) in 2020.”

What Are the RMD Rule Changes?

The SECURE Act increased the age of required minimum distributions (RMDs) for those who turn 70½ after 12/31/2019 to the age of 72. The CARES Act suspended RMDs during 2020. The suspension applies to traditional IRAs, SEP IRAs, SIMPLE IRAs, 401(k), 403(b) and governmental 457(b) plans for both retirement account owners and inherited IRA beneficiaries. It includes any 2019 RMDs due by April 1, 2020, as well as all 2020 RMDs due this calendar year.

Making Qualified Charitable Distributions (QCDs)?

You can still do so, up to a maximum of $100,000 per individual. The only change is that there is no RMD to satisfy for 2020. 

Reversing Your Already Taken 2020 RMDs

Professional commentary and many accountants are suggesting that RMDs taken after February 1 may be reversed and put back into an IRA before July 15. 

Our advisors can help you talk through how best to handle RMDs that have already been taken. The CARES Act may provide relief to those who took an unwanted RMD on February 1 or later and extends the time to roll back those funds into a retirement account until July 15. However, you cannot reverse any RMD already taken in 2020 from an inherited IRA account. Future RMDs in 2021 and beyond will be due as usual. 

Additionally, if the RMD suspension allows a retiree to be in a lower tax bracket than expected, with lower IRA values due to the market volatility, it may be an opportune time to discuss strategic partial or complete Roth conversions of IRA assets.

Please check your eligibility for reversing RMDs with your accountant and speak to your financial advisor.

Section 2: Access to Funds

“I may need to access funds from my retirement accounts unexpectedly due to this year's economic downturn.”

I have been directly affected by the coronavirus and need funds. 

Take it out on loan

The CARES Act expands the maximum 401(k) loan amount to $100,000 for employer-sponsored retirement accounts. The CARES Act further amends the vested balance that may be used from 50% to 100% of the vested balance, up to $100,000. Payments owed on the loan may be deferred up to one year.  

Take an early distribution

The CARES Act allows for individuals who have been directly affected by the coronavirus to access their retirement accounts without the usual 10% early withdrawal penalty for up to $100,000 of retirement funds for those who are under 59½. For those older, there is not a penalty on withdrawals.

However, you would still owe income taxes on the amount withdrawn at your ordinary income tax bracket. The distributions can be repaid over three years, and by default, taxes are spread evenly over 2020, 2021 and 2022.

IMPORTANT NOTE: Due to the taxable nature of this withdrawal, we would recommend it as a last resort if you cannot access a loan, or do not expect to be able to repay the loan from future income. 

Section 3: Roth Conversions

“I might consider doing a Roth conversion in 2020 either because my income is lower than usual, or the values of my traditional IRA have declined.”

Many are considering partial or complete conversions of their traditional IRAs to Roth IRAs. The reason this is attractive now is that with the value of the IRA assets lower than they used to be, the cost of converting them to Roth IRA assets from a tax standpoint has declined. By converting, the assets move from an account that will be taxed at ordinary income rates in retirement to a tax-free account.

In addition, many clients are projected to be in a lower tax bracket in 2020 than they have been in previous years. A lower tax bracket in 2020 would have the effect of making Roth conversions less costly as well. If you are finding yourself in a tax bracket in the table below, a conversation with your advisor may be warranted.

    

Reference

Ed Slott, “Unexpected Rollover Tax Relief for Unwanted RMDs.” Financial Planning, April 10, 2020.