RMD Relief and Guidance for 2023
Earlier IRS proposed regulations regarding required minimum distributions (RMDs) reflected changes made by the Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019. IRS delayed releasing final regulations to include changes to RMDs made by the SECURE 2.0 Act of 2022, which was passed in late 2022. IRS issued interim RMD relief and guidance for 2023. Final RMD regulations, when issued, will not apply before 2024.
Relief with respect to change in RMD age to 73
The RMD age is the age at which IRA owners and employees must generally start taking distributions from their IRAs and workplace retirement plans. There is an exception that may apply if an employee is still working for the employer sponsoring the plan. (For Roth IRAs, RMDs are not required during the lifetime of the IRA owner.)
The SECURE 2.0 Act of 2022 increased the general RMD age from 72 to 73 (for individuals reaching age 72 after 2022). Since then, some individuals reaching age 72 in 2023 have taken distributions for 2023 even though they do not need to take a distribution until they reach age 73 under the changes made by the legislation.
Distributions, other than RMDs which cannot be rolled over, from IRAs and other workplace retirement plans can generally be rolled over tax-free to another retirement account within 60 days of the distribution. The 60-day window for a rollover may already have passed for some individuals who took distributions that were not required in 2023.
To help those individuals, the IRS is extending the deadline for the 60-day rollover period for certain distributions until September 30, 2023. Specifically, the relief is available with respect to any distributions made between January 1, 2023, and July 31, 2023, to an IRA owner or employee (or the IRA owner’s surviving spouse) who was born in 1951 if the distributions would have been RMDs but for the change in the RMD age to 73.
Generally, only one rollover is permitted from a particular IRA within a 12-month period. The special rollover allowed under this relief is permitted even if the IRA owner or surviving spouse has rolled over a distribution in the last 12 months. However, making such a rollover will preclude the IRA owner or surviving spouse from rolling over a distribution in the next 12 months. However, an individual could still make direct trustee-to-trustee transfers since they do not count as rollovers under the one-rollover-per-year rule.
Inherited IRAs and retirement plans
Before the SECURE Act, RMDs for IRAs and retirement plans inherited before 2020 could generally be spread over the life expectancy of a designated beneficiary. The SECURE Act changed the RMD rules by requiring that in most cases the entire account must be distributed 10 years after the death of the IRA owner or employee if there is a designated beneficiary (and if death occurred after 2019). However, an exception allows an eligible designated beneficiary to take distributions over their life expectancy and the 10-year rule would not apply until after the death of the eligible designated beneficiary in that case.
Eligible designated beneficiaries include a spouse or minor child of the IRA owner or employee, a disabled or chronically ill individual, and an individual no more than 10 years younger than the IRA owner or employee. The entire account would also need to be distributed 10 years after a minor child reaches the age of majority (i.e., at age 31).
The proposed regulations issued in early 2022 surprised many when they suggested that annual distributions are also required during the first nine years of such 10-year periods in most cases. Comments on the proposed regulations sent to the IRS asked for some relief because RMDs had already been missed and a 25% penalty tax (50% prior to 2023) is assessed when an individual fails to take an RMD.
The IRS has announced that it will not assert the penalty tax in certain circumstances where individuals affected by the RMD changes failed to take annual distributions in 2023 during one of the 10-year periods. (Similar relief was previously provided for 2021 and 2022.) For example, relief may be available if the IRA owner or employee died in 2020, 2021, or 2022 and on or after their required beginning date (The required beginning date is usually April 1 of the year after the IRA owner or employee reaches RMD age. Roth IRA owners are always treated as dying before their required beginning date) and the designated beneficiary who is not an eligible designated beneficiary did not take annual distributions for 2021, 2022, or 2023 as required (during the 10-year period following the IRA owner’s or employee’s death). Relief might also be available if an eligible designated beneficiary died in 2020, 2021, or 2022 and annual distributions were not taken in 2021, 2022, or 2023 as required (during the 10-year period following the eligible designated beneficiary’s death).
SECURE 2.0 Helps Small Employers Help Their Employees
Approximately 78% of people who work for companies with fewer than 10 employees and about 65% of those who work for companies with 10 to 24 employees do not have access to a retirement plan at work.1 That’s unfortunate, because workers with a retirement plan are far more likely to save for retirement than those without a plan. In 2022, 62% of those without a retirement plan had accumulated less than $1,000 for retirement, compared with 71% of those with a plan who had saved at least $50,000. More than four in 10 workers with access to a work-based plan had amassed a quarter million dollars or more.2
In December 2022, Congress aimed to address this issue (among others) by passing legislation that will help small employers more efficiently and cost-effectively offer retirement plans to their workforces, while providing incentives to help improve participation rates among lower-income workers. The SECURE 2.0 Act of 2022 — so named because it builds upon the original Setting Every Community Up for Retirement Enhancement (SECURE) Act passed in 2019 — is a sweeping set of provisions designed to improve the nation’s retirement-planning health. Here is a brief look at some of the tax perks, rule changes, and incentives included in the legislation.
Tax Perks for Employers in 2023
Perhaps most appealing to small business owners, the Act enhances the tax credits associated with adopting new retirement plans, beginning in 2023.
For employers with 50 employees or less, the pension plan start-up tax credit increases from 50% of qualified start-up costs to 100%. Employers with 51 to 100 employees will still be eligible for the 50% credit. In either case, the credit maximum is $5,000 per year (based on the number of employees) for the first three years the plan is in effect.
In addition, the Act offers a tax credit for employer contributions to employee accounts for the first five tax years of the plan’s existence. The amount of the credit is a maximum of $1,000 for each participant earning not more than $100,000 (adjusted for inflation) in income. Each year, a specific percentage applies. In years one and two, employers receive 100% of the credit; in year three, 75%; in year four, 50%; and in year five, 25%. The amount of credit is reduced for employers with 51 to 100 employees. No credit is allowed for employers with more than 100 workers.
Rule Changes and Relevant Years
In 2024, employers will be able to adopt a deferral-only starter 401(k) or safe-harbor 403(b) plan, which are designed to be lower cost and easier to administer than traditional plans. Both plan types have auto-enrollment features and accept employee contributions only. Employees are enrolled at minimum contribution rates of 3%, not to exceed 15%, and may opt out. The plans may accept up to $6,000 per participant annually ($7,000 for those 50 and older), indexed for inflation.
SIMPLE plans may benefit from two new contribution rules. First, employers may make nonelective contributions to employee accounts up to 10% of compensation or $5,000. Second, the annual contribution limits (standard and catch-up) for employers with no more than 25 employees will increase by 10%, rather than the limit that would otherwise apply. An employer with 26 to 100 employees would be permitted to allow higher contributions if the employer makes either a matching contribution on the first 4% of compensation or a 3% nonelective contribution to all participants, whether they contribute. These changes also take effect in 2024.
Beginning in 2025, 401(k) and 403(b) plans will generally be required to automatically enroll eligible employees and automatically increase their contribution rates every year, unless they opt out. Employees will be enrolled at a minimum contribution rate of 3% of income, and rates will increase each year by 1% until they reach at least 10% (but not more than 15%). Not all plans will be subject to this new provision. Exceptions include those in existence prior to December 29, 2022; those sponsored by organizations less than three years old or employing 10 or fewer workers; governmental and church plans; and SIMPLE 401(k) plans.
Incentives for Participation
SECURE 2.0 drafters were creative in finding ways to encourage workers, particularly those with lower incomes, to take advantage of their plans. For example, effective immediately, employers may choose to offer small-value financial incentives, such as gift cards, for joining a plan. Beginning in 2024, employers may provide a matching contribution on employee student loan payments, which should help encourage younger workers to plan for their future. Also in 2024, workers will be able to withdraw up to $1,000 a year to cover unforeseeable or immediate emergencies without having to pay a 10% early distribution penalty, which should help address the fear of locking up retirement-plan contributions for many years. Employees will have up to three years to repay the emergency distributions and will not be able to take a second emergency distribution during this three-year period unless the first has been reimbursed.
1) AARP, July 2022
2) Employee Benefit Research Institute, 2022
Roth Conversions are getting a lot of attention
Some consider the drop in the markets maybe a good time for some to consider converting traditional IRAs to Roth IRAs. The withdrawal of the assets from the traditional IRA would be taxed currently. The resulting tax would be lower as the value of the investment would be lower. The future growth of the assets would not be taxable in the Roth or to the beneficiaries of the Roth. There are many assumptions and conditions to achieve the desired benefits.
Tax rate assumptions
One assumption is that you will be in a lower tax bracket when you retire. A related assumption is that the tax laws will not change when the funds are distributed from the Roth. One approach would be to calculate your tax based on various assumptions. Depending on your current tax bracket and assumed future tax brackets to see how much to convert now.
Future values
There is a risk that the value of the investment will not grow or will drop in value.
Two five-year tests
To qualify for tax-free and penalty-free withdrawal of earnings, including earnings on converted amounts, a Roth account must meet a five-year holding period beginning January 1 of the year your first Roth account was opened, and the withdrawal must take place after age 59½ or meet an IRS exception. If you have had a Roth IRA for some time, this may not be an issue, but it could come into play if you open your first Roth IRA for the conversion.
Assets converted to a Roth IRA can be withdrawn free of ordinary income tax at any time, because you paid taxes at the time of the conversion. However, a 10% penalty may apply if you withdraw the assets before the end of a different five-year period, which begins January 1 of the year of each conversion, unless you are age 59½ or another exception applies.
Roth account are not subject to Required Minimum Distributions (RMD)
Roth IRAs are not required to minimum distributions. Distributions are tax-free to the original owner of the Roth IRA and spouse beneficiaries who treat a Roth IRA as their own. Other beneficiaries inheriting a Roth IRA are subject to the RMD rules. The longer your investments can pursue growth, the more advantageous it may be for you and your beneficiaries to have tax-free income.
There are many considerations and assumption in determining if a Roth Conversion is appropriate for anyone. The above is not intended as a complete discussion of the subject. A trusted advisor should be consulted to see if a conversion should be considered .
All investing involves risk, including the possible loss of principal, and there is no guarantee that any investment strategy will be successful.
Required Distributions from Inherited Retirement Accounts Change after 2019
Changes were made to the Required Minimum Distributions (RMD) for inherited Retirement Accounts by The Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019. The ability of beneficiaries to “stretch-out” the distribution of the account balance of an inherited defined contribution plan or an IRA were changed. After 2019 beneficiaries must distribute the full amount in the account within 10 years of the original owner’s death, with some exceptions. Where an exception applies, the entire account must generally be emptied within 10 years of the beneficiary’s death, or within 10 years after a minor child beneficiary reaches age 21.
IRS issued proposed regulations (generally applicable starting in 2022) that interpret the revised required minimum distribution (RMD) rules in February 2022. The new rules are complex and create uncertainty. Hopefully, the IRS will simplify and answer the questions. Account owners and their beneficiaries would benefit by familiarize themselves with these new interpretations and how they might be affected by them.
RMD BasicsOwners of traditional IRAs and participants of retirement plan like a 401(k) must start taking RMDs in the year they reach age 72 (age 70½ if you were born before July 1, 1949). An owner of the account may be able to wait until the year after retiring to start RMDs from that account at age 72 or older and still working for the employer that maintains the retirement plan. No RMDs are required from a Roth IRA during lifetime (beneficiaries are subject to inherited retirement account rules). Generally, a 50% penalty applies to the extent that RMDs are not timely distributed.
Changes were made to the Required Minimum Distributions (RMD) for inherited Retirement Accounts by The Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019. The ability of beneficiaries to “stretch-out” the distribution of the account balance of an inherited defined contribution plan or an IRA were changed. After 2019 beneficiaries must distribute the full amount in the account within 10 years of the original owner’s death, with some exceptions. Where an exception applies, the entire account must generally be emptied within 10 years of the beneficiary’s death, or within 10 years after a minor child beneficiary reaches age 21.
IRS issued proposed regulations (generally applicable starting in 2022) that interpret the revised required minimum distribution (RMD) rules in February 2022. The new rules are complex and create uncertainty. Hopefully, the IRS will simplify and answer the questions. Account owners and their beneficiaries would benefit by familiarize themselves with these new interpretations and how they might be affected by them.
RMD Basics
Owners of traditional IRAs and participants of retirement plan like a 401(k) must start taking RMDs in the year they reach age 72 (age 70½ if you were born before July 1, 1949). An owner of the account may be able to wait until the year after retiring to start RMDs from that account at age 72 or older and still working for the employer that maintains the retirement plan. No RMDs are required from a Roth IRA during lifetime (beneficiaries are subject to inherited retirement account rules). Generally, a 50% penalty applies to the extent that RMDs are not timely distributed.
The required beginning date (RBD) for the first year must be taken by April 1 of the next year. After the first distribution, annual distributions must be taken by the end of each year. Note, if the first distribution is delayed until April 1 two distributions will be required for that year, one by April 1 and the other by December 31.
The RMD rules govern how quickly retirement plans and/or IRAs must be distributed by the beneficiaries of the accounts. The rules are largely based on two factors: (1) the individuals named as beneficiaries of the retirement plan, and (2) whether the owner dies before or on or after your RBD. Because no lifetime RMDs are required from a Roth IRA, Roth IRA owners are always treated as dying before their RBD.
Who Is Subject to the 10-Year Rule?
Eligible designated beneficiaries (EDBs) are permitted to stretch out distributions to a limited extent. EDB’s include your surviving spouse, your minor children, any individuals not more than 10 years younger than you, and certain disabled or chronically ill individuals. Generally, EDBs can take annual required distributions based on remaining life expectancy. However, once an EDB dies, or once a minor child EDB reaches age 21, any remaining funds must be distributed within 10 years.
Note that the SECURE Act requires that if a designated beneficiary is not an EDB, the entire account must be fully distributed within 10 years after your death.
What If the Designated Beneficiary Is Not an EDB?
If you die before your required beginning date, no distributions are required during the first nine years after your death, but the entire account must be distributed in the tenth year.
If you die on or after your required beginning date, annual distributions based on the designated beneficiary’s remaining life expectancy are required in the first nine years after the year of your death, then the remainder of the account must be distributed in the tenth year.
What If the Beneficiary Is a Nonspouse EDB?
Annual distributions will be required based on your remaining life expectancy. If death occurs before the required beginning date, required annual distributions will be based on the EDB’s remaining life expectancy. If the owner of the account dies on or after their required beginning date, annual distributions after the owner’s death will be based on the greater of (a) what would have been the owners remaining life expectancy or (b) the beneficiary’s remaining life expectancy. Also, if distributions are calculated each year based on what would have been the remaining life expectancy, the entire account must be distributed by the end of the calendar year in which the beneficiary’s remaining life expectancy would have been reduced to one or less (if the beneficiary’s remaining life expectancy had been used).
After the death of the beneficiary or if the beneficiary is a minor child turns age 21, annual distributions based on remaining life expectancy must continue during the first nine years after the year of such an event. The entire account must be fully distributed in the tenth year.
What If a Designated Beneficiary A Spouse?
There are many special rules if a spouse is a designated beneficiary. The 10-year rule generally has no effect until after the death of the surviving spouse, or possibly until after the death of the spouse’s designated beneficiary.
What Life Expectancy Is Used to Determine RMDs After Death?
Annual required distributions based on life expectancy are generally calculated each year by dividing the account balance as of December 31 of the previous year by the applicable denominator for the current year (but the RMD will never exceed the entire account balance on the date of the distribution).
When life expectancy is used, the applicable denominator is the life expectancy in the calendar year of death, reduced by one for each subsequent year. When the nonspouse beneficiary’s life expectancy is used, the applicable denominator is that beneficiary’s life expectancy in the year following the calendar year of your death, reduced by one for each subsequent year. (Note that if the applicable denominator is reduced to zero in any year using this “subtract one” method, the entire account would need to be distributed.) And at the end of the appropriate 10-year period, any remaining balance must be distributed.
The rules relating to required minimum distributions are complicated, and the consequences of making a mistake can be severe. Talk to a tax professional to understand how the rules, and the new proposed regulations, apply to your individual situation.
2021 RMDs
Required Minimum Distributions (RMD) for 2021 must be paid by December 31, 2021. The requirement for 2020 was waived. Check with the custodian(s) where your IRA(s) are held if you have not yet received your entire RMDs for 2021. Some custodians have indicated delays in completing time sensitive transactions by December 31, 2021.
Annual RMDs have been required to begin at age 70.5 before a recent change. This requirement still applies to anyone born by June 30, 1949. Anyone born on or after July 1, 1949, are now required to start at age 72.
An exception to the beginning date applies to employees of retirement plans sponsored by their employers unless they own 5% or more of their employer. The required beginning date is postponed until they retire.
The first RMD may be postponed till April 1 of the following year. Delaying the distribution will result in 2 distributions in the following year. Among the factors to consider is the tax impact of delaying the RMD to April 1 of the next year.
RMDs apply to defined contributions plans and Induvial Retirement Plans (IRA). The distribution rules appl to IRA, SEP IRA, SIMPLE IRA, and Qualified Plans, such as Simplified Employee Plans, 401(k) Plans, are examples of Qualified Plans.
A 50% penalty applies if the RMDs are not paid by December 31 of the year required.
The above rules do not apply beneficiaries of inherited accounts. The rules for inherited is beyond the scope of this discussion.
RMDs are the minimum distribution. Larger distributions are permitted. This may apply when the applicable tax rate will be different in each year. Another factor is if you have a large or unexpected expenditures.
Your account balance is usually calculated as of December 31 of the year preceding the calendar year for which the distribution is required to be made. That balance is generally divided by the life expectancy factor determined by the IRS. You use your attained age in the distribution year by factor in the applicable IRS Uniform Lifetime Tables. The table assumes that you have designated a beneficiary who is exactly 10 years younger than you are. Every IRA owner’s and plan participant’s calculation is based on the same assumption.
Different calculations are used if the spouse is more than 10 years younger than you. the calculation of your RMDs may be based on the longer joint and survivor life expectancy of you and your spouse.
A new table will be used starting in 20222. The tables will reduce the annual RMD. The foregoing is provided for information purposes only. It is not intended or designed to provide legal, accounting, tax, investment, or other professional advice. Such advice requires consideration of individual circumstances. Before any action is taken based upon this information, it is essential that competent, individual, professional advice be obtained. JAS Financial Services, LLC is not responsible for any modifications made to this material, or for the accuracy of information provided by other source
Required Minimum Distributions (RMD) for 2021 must be paid by December 31, 2021. The requirement for 2020 was waived. Check with the custodian(s) where your IRA(s) are held if you have not yet received your entire RMDs for 2021. Some custodians have indicated delays in completing time sensitive transactions by December 31, 2021.
Annual RMDs have been required to begin at age 70.5 before a recent change. This requirement still applies to anyone born by June 30, 1949. Anyone born on or after July 1, 1949, are now required to start at age 72.
An exception to the beginning date applies to employees of retirement plans sponsored by their employers unless they own 5% or more of their employer. The required beginning date is postponed until they retire.
The first RMD may be postponed till April 1 of the following year. Delaying the distribution will result in 2 distributions in the following year. Among the factors to consider is the tax impact of delaying the RMD to April 1 of the next year.
RMDs apply to defined contributions plans and Induvial Retirement Plans (IRA). The distribution rules appl to IRA, SEP IRA, SIMPLE IRA, and Qualified Plans, such as Simplified Employee Plans, 401(k) Plans, are examples of Qualified Plans.
A 50% penalty applies if the RMDs are not paid by December 31 of the year required.
The above rules do not apply beneficiaries of inherited accounts. The rules for inherited is beyond the scope of this discussion.
RMDs are the minimum distribution. Larger distributions are permitted. This may apply when the applicable tax rate will be different in each year. Another factor is if you have a large or unexpected expenditures.
Your account balance is usually calculated as of December 31 of the year preceding the calendar year for which the distribution is required to be made. That balance is generally divided by the life expectancy factor determined by the IRS. You use your attained age in the distribution year by factor in the applicable IRS Uniform Lifetime Tables. The table assumes that you have designated a beneficiary who is exactly 10 years younger than you are. Every IRA owner’s and plan participant’s calculation is based on the same assumption.
Different calculations are used if the spouse is more than 10 years younger than you. the calculation of your RMDs may be based on the longer joint and survivor life expectancy of you and your spouse.
A new table will be used starting in 20222. The tables will reduce the annual RMD.
The foregoing is provided for information purposes only. It is not intended or designed to provide legal, accounting, tax, investment, or other professional advice. Such advice requires consideration of individual circumstances. Before any action is taken based upon this information, it is essential that competent, individual, professional advice be obtained. JAS Financial Services, LLC is not responsible for any modifications made to this material, or for the accuracy of information provided by other source
Required Minimum Distributions (RMD) for 2021
Following are some of the developments to be consider before December 31,2021.
What Are RMDs?
Required annual distributions are required if you have a traditional IRA and most employer-sponsored retirement plans. RMDs are not required from an employer plan if you are still working at the company sponsoring the plan and you do not own more than 5% of the company. You can always take more than the required amount if you choose.
The portion of an RMD representing earnings and tax-deductible contributions is taxed as ordinary income, unless the RMD is a qualified distribution from a Roth account. Failing to take the full amount of an RMD could result in a penalty tax of 50% of the difference.
Everyone who reached 70½ (required beginning date) before January 1, 2020, was required to start making annual RMDs. Generally, RMDs must be taken by December 31 each year. You can delay your first RMD until April 1 following the year in which you reach RMD age; however, you will then need to take two RMDs in one year — the first by April 1 and the second by December 31. (If you reached age 72 in the first half of 2021, different rules apply; see below.) You should weigh the decision to delay your first RMD carefully. Taking two distributions in one year might bump you into a higher income tax bracket for that year.
New RMD Age and a 2020 Waiver Add Complexity
The Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019 raised the minimum RMD age to 72 from 70½ beginning in 2020. That means if you reached age 70½ before 2020, you are currently required to take minimum distributions.
However, there was a pandemic-related rule change in 2020 that might have affected some retirement savers who reached age 70½ in 2019. To help individuals manage financial challenges brought on by the pandemic, RMDs were waived in 2020, including any postponed from 2019. In other words, some taxpayers could have benefited from waiving both their 2019 and 2020 RMDs.
Anyone who took advantage of the 2020 waiver should note that RMDs have resumed in 2021 and need to be taken by December 31. The option to delay to April 1, 2022, applies only to first RMDs for those who have reached or will reach age 72 on or after July 1, 2021.
New Life Expectancy Tables
The IRS publishes tables in Publication 590-B that are used to help calculate RMDs. To determine the amount of a required distribution, you would divide your account balance as of December 31 of the previous year by the appropriate age-related factor in one of three available tables.
Recognizing that life expediencies have increased, the IRS has issued new tables designed to help investors stretch their retirement savings over a longer period. These new tables will take effect for RMDs beginning in 2022. Investors may be pleased to learn that calculations will typically result in lower annual RMD amounts and potentially lower income tax obligations as a result. The old tables still apply to 2021 distributions, even if they’re postponed until 2022.
The New Fixed Distribution
The New Fixed Distribution Rule
The beneficiaries of an IRA, other than a spouses and certain other specified persons, are required to take the balance of the account within 10 years. The distributions do not have to be consist in each year if the entire balance is paid out within 10-years
Timing
Allow for delays in in processing and delivery of the distributions before December 31, 2021.
For more information on RMDs, consider speaking with your financial and tax professionals.
IRS Clarifies COVID-19 Relief Measures for Retirement Savers
The Coronavirus Aid, Relief, and Economic Security (CARES) Act passed in March 2020 ushered in several measures designed to help IRA and retirement plan account holders cope with financial fallout from the virus. The rules were welcome relief to many people, but left questions about the details unanswered. In late June, the IRS released Notices 2020-50 and 2020-51, which shed light on these outstanding issues.
Required minimum distributions (RMDs)
One CARES Act measure suspends 2020 RMDs from defined contribution plans and IRAs. Account holders who prefer to forgo RMDs from their accounts, or to withdraw a lower amount than required, may do so. The waiver also applies to account holders who turned 70½ in 2019 and would have had to take their first RMD by April 1, 2020, as well as beneficiaries of inherited retirement accounts.
One of the questions left unanswered by the legislation was: “What if an account holder took an RMD in 2020 before passage of the CARES Act and missed the 60-day window to roll the money back into a qualified account?”
In April, IRS Notice 2020-23 extended the 60-day rollover rule for those who took a distribution on or after February 1, 2020, allowing participants to roll their money back into an eligible retirement account by July 15, 2020. This seemingly left account owners who had taken RMDs in January without recourse. However, IRS Notice 2020-51 rectified the situation by stating that all 2020 RMDs — even those received as early as January 1 — may be rolled back into a qualified account by August 31, 2020. Moreover, such a rollover would not be subject to the one-rollover-per-year rule.
This ability to undo a 2020 RMD also applies to beneficiaries who would otherwise be ineligible to conduct a rollover. (However, in their case, the money must be rolled back into the original account.)
This provision does not apply to defined benefit plans.
Coronavirus withdrawals and loans
Another measure in the CARES Act allows qualified IRA and retirement plan account holders affected by the virus to withdraw up to $100,000 of their vested balance without having to pay the 10% early-withdrawal penalty (25% for certain SIMPLE IRAs). They may choose to spread the income from these “coronavirus-related distributions,” or CRDs, ratably over a period of three years to help manage the associated income tax liability. They may also recontribute any portion of the distribution that would otherwise be eligible for a tax-free rollover to an eligible retirement plan over a three-year period, and the amounts repaid would be treated as a trustee-to-trustee transfer, avoiding tax consequences.(1)
In addition, the CARES Act included a provision stating that between March 27 and September 22, 2020, qualified coronavirus-affected retirement plan participants may also be able to borrow up to 100% of their vested account balance or $100,000, whichever is less. In addition, any qualified participant with an outstanding loan who has payments due between March 27, 2020, and December 31, 2020, may be able to delay those payments by one year.
IRS Notice 2020-50
To be eligible for coronavirus-related provisions in the CARES Act, “qualified individuals” were originally defined as IRA owners and retirement plan participants who were diagnosed with the virus, those whose spouses or dependents were diagnosed with the illness, and account holders who experienced certain adverse financial consequences as a result of the pandemic. IRS Notice 2020-50 expanded that definition to also include an account holder, spouse, or household member who has experienced pandemic-related financial setbacks as a result of:
- A quarantine, furlough, layoff, or reduced work hours
- An inability to work due to lack of childcare
- Owning a business forced to close or reduce hours
- Reduced pay or self-employment income
- A rescinded job offer or delayed start date for a job
These expanded eligibility provisions enhance the opportunities for account holders to take a CRD.
The Notice clarifies that qualified individuals can take multiple distributions totaling no more than $100,000 regardless of actual need. In other words, the total amount withdrawn does not need to match the amount of the adverse financial consequence. (Retirement investors should consider the pros and cons carefully before withdrawing money.)
It also states that individuals will report a coronavirus-related distribution (or distributions) on their federal income tax returns and on Form 8915-E, Qualified 2020 Disaster Retirement Plan Distributions and Repayments. Individuals can also use this form to report any recontributed amounts. As noted above, individuals can choose to either spread the income ratably over three years or report it all in year one; however, once a decision is indicated on the initial tax filing, it cannot be changed. Note that if multiple CRDs occur in 2020, they must all be treated consistently — either ratably over three years or reported all at once.
Taxpayers who recontribute amounts after paying taxes on reported CRD income will have to file amended returns and Form 8915-E to recoup the payments. Taxpayers who elect to report income over three years and then recontribute amounts that exceed the amount required to be reported in any given year may “carry forward” the excess contributions — i.e., they may report the additional amounts on the next year’s tax return.
The Notice also clarifies that amounts can be recontributed at any point during the three-year period beginning the day after the day of a CRD. Amounts recontributed will not apply to the one-rollover-per-year rule.
Regarding plan loans, participants who delay their payments as permitted by the CARES Act should understand that once the delay period ends, their loan payments will be recalculated to include interest that accrued over the time frame and reamortized over a period up to one year longer than the original term of the loan.
Retirement plans are not required to adopt the loan and withdrawal provisions, so check with your plan administrator to see which options might apply to you. However, qualified individuals whose plans do not specifically adopt the CARES Act provisions may choose to categorize certain other types of distributions — including distributions that in any other year would be considered RMDs — as CRDs on their tax returns, provided the total amount does not exceed $100,000.
For more information, review IRS Notices 2020-50 and 2020-51, and speak with a tax professional.
(1)Qualified beneficiaries may also treat a distribution as a CRD; however, nonspousal beneficiaries are not permitted to recontribute funds, as they would not otherwise be eligible for a rollover.
The foregoing is provided for information purposes only. It is not intended or designed to provide legal, accounting, tax, investment or other professional advice. Such advice requires consideration of individual circumstances. Individuals have different situations and preferences. Before any action is taken based upon this information, it is essential that competent individual professional advice be obtained. JAS Financial Services, LLC is not responsible for any modifications made to this material, or for the accuracy of information provided by other sources.
Coping with Market Volatility: Be Willing to Take Advantage of Market Downturns
Anyone can look good during a bull market. Smart investors are prepared to weather the inevitable rough patches, and even the best aren’t successful all the time. When the market goes off the tracks, knowing why you originally made a specific investment can help you evaluate whether those reasons still hold, regardless of what the overall market is doing.
If you no longer want to hold an investment, you could take a tax loss, if that’s a possibility. Selling locks in any losses on an investment, but it also generates cash that can be used to purchase other investments that may be available at an appealing discount. Sound research might turn up buying opportunities on stocks that have dropped for reasons that have nothing to do with the company’s fundamentals. In a down market, most stocks are available at lower prices, but some are better bargains than others.
There also are other ways to reap some benefit from a down market. If the value of your IRA or 401(k) has dropped dramatically, you likely won’t be able to harvest a tax benefit from those losses, because taxes generally aren’t owed on those accounts until the money is withdrawn. However, if you’ve considered converting a tax-deferred plan to a Roth IRA, a lower account balance might make a conversion more attractive. Though the conversion would trigger income taxes in the year of the conversion, the tax would be calculated on the reduced value of your account. With some expert help, you can determine whether and when such a conversion might be advantageous.
A volatile market is never easy to endure, but learning from it can better prepare you and your portfolio to weather and take advantage of the market’s ups and downs.
For more information on these strategies, contact us. We’re here to help.
All investing involves risk, including the possible loss of principal, and there is no guarantee that any investment strategy will be successful.
Although there is no assurance that working with a financial professional will improve investment results, a professional can evaluate your objectives and available resources and help you consider appropriate long-term financial strategies.
To qualify for the tax-free and penalty-free withdrawal of earnings (and assets converted to a Roth), Roth IRA distributions must meet a five-year holding requirement, and the distribution must take place after age 59½ (with some exceptions). Under current tax law, if all conditions are met, the account will incur no further income tax liability for the rest of the owner’s lifetime or for the lifetime of the owner’s heirs, regardless of how much growth the account experiences.
CARES Act: Retirement Plan Relief Provisions
The Coronavirus Aid, Relief, and Economic Security (CARES) Act was signed into law on March 27, 2020. This $2 trillion emergency relief package represents a bipartisan effort to assist both individuals and businesses in the ongoing coronavirus pandemic and accompanying economic crisis. The CARES Act provisions for retirement plan relief for individuals under federal tax law are discussed here.
For those seeking access to their retirement funds, these include special provisions for coronavirus-related distributions and loans. For those seeking to preserve their retirement funds, certain required minimum distributions from retirement funds have been suspended.
Coronavirus-related distributions
A 10% penalty tax generally applies to distributions from an employer retirement plan or individual retirement account (IRA) before age 59½ unless an exception applies. Due to the coronavirus pandemic, the penalty tax will not apply to up to $100,000 of coronavirus-related distributions to an individual during 2020. Additionally, income resulting from a coronavirus-related distribution is spread over a three-year period for tax purposes unless an individual elects otherwise. Coronavirus-related distributions can also be paid back to an eligible retirement plan within three years of the day after the distribution was received.
What does “coronavirus related” mean?
For purposes of the distribution and loan rules described here, “coronavirus related” applies to individuals diagnosed with the illness or who have a spouse or dependent diagnosed with the illness, as well as individuals who experience adverse financial consequences as a result of the pandemic. Adverse financial consequences could include quarantines, furloughs, and business closings.
Loans from qualified plans
Qualified plans such as a 401(k) can allow an employee to take out a loan. These loans can generally be repaid over a period of up to five years. They’re also generally limited to the lesser of $50,000 or 50% of the total benefit the employee has a right to receive under the plan. However, for a coronavirus-related loan made between March 27, 2020, and September 22, 2020, the loan limit is increased to $100,000 or 100% of the amount the employee can rightfully receive under the plan (whichever amount is less). In the case of a loan outstanding after March 26, 2020, the due date for any repayment that would normally be due between March 27, 2020, and December 31, 2020, may be delayed by coronavirus-related qualifying individuals for one year, and the delay period is disregarded in determining the five-year period and the term of the loan.
Most required minimum distributions (RMDs) suspended for 2020
RMDs are generally required to start from an employer retirement plan or IRA by April 1 of the year after the plan participant or IRA owner reaches age 70½ (age 72 for those who reach age 70½ after 2019). If an employee continues working after age 70½ (age 72 for those who reach age 70½ after 2019), RMDs from an employer retirement plan maintained by the current employer can be deferred until April 1 of the year after retirement. (RMDs are not required from a Roth IRA during the lifetime of the IRA owner.) RMDs are also generally required to beneficiaries after the death of the plan participant or IRA owner. A 50% penalty applies to an RMD that is not made.
The CARES Act suspends RMDs from IRAs and defined contribution plans (other than Section 457 plans for nongovernmental tax-exempt organizations) for 2020. This waiver includes any RMDs for 2019 with an April 1, 2020, required beginning date that were not taken in 2019. This one-year suspension does not generally affect how post-2020 RMDs are determined.
A recent IRS Notice (2020-23) clarifies the application to RMDs taken between February 1 and May 15. The 60-day rollover rule is waived if rolled over by July 15, 2020. The one-per-year rule still applies to all rollover situations, and inherited IRA RMDs cannot be rolled over.
There may be additional guidance issued in the future. It is not clear why RMDs made in January and after May 15th are not covered. Maybe the one-per-year rule would be modified.
The SECURE Act and Your Retirement Savings
The Setting Every Community Up for Retirement Enhancement (SECURE) Act was enacted in December 2019 as part of a larger federal spending package. This long-awaited legislation expands savings opportunities for workers and includes new requirements and incentives for employers that provide retirement benefits. At the same time, it restricts a popular estate planning strategy for individuals with significant assets in IRAs and employer-sponsored retirement plans.
Here are some of the changes that may affect your retirement, tax, and estate planning strategies. All of these provisions were effective January 1, 2020, unless otherwise noted.
Benefits for retirement savers
Later RMDs. Individuals born on or after July 1, 1949, can wait until age 72 to take required minimum distributions (RMDs) from traditional IRAs and employer-sponsored retirement plans instead of starting them at age 70½ as required under previous law. This is a boon for individuals who don’t need the withdrawals for living expenses, because it postpones payment of income taxes and gives the account a longer time to pursue tax-deferred growth. As under previous law, participants may be able to delay taking withdrawals from their current employer’s plan as long as they are still working.
No traditional IRA age limit. There is no longer a prohibition on contributing to a traditional IRA after age 70½ — taxpayers can make contributions at any age as long as they have earned income. This helps older workers who want to save while reducing their taxable income. But keep in mind that contributions to a traditional IRA only defer taxes. Withdrawals, including any earnings, are taxed as ordinary income, and a larger account balance will increase the RMDs that must start at age 72.
Tax breaks for special situations. For the 2019 and 2020 tax years, taxpayers may deduct unreimbursed medical expenses that exceed 7.5% of their adjusted gross income. In addition, withdrawals may be taken from tax-deferred accounts to cover medical expenses that exceed this threshold without owing the 10% penalty that normally applies before age 59½. (The threshold returns to 10% in 2021.) Penalty free early withdrawals of up to $5,000 are also allowed to pay for expenses related to the birth or adoption of a child. Regular income taxes apply in both situations.
Tweaks to promote saving. To help workers track their retirement savings progress, employers must provide participants in defined contribution plans with annual statements that illustrate the value of their current retirement plan assets, expressed as monthly income received over a lifetime. Some plans with auto-enrollment may now automatically increase participant contributions until they reach 15% of salary, although employees can opt out. (The previous ceiling was 10%.)
More part-timers gain access to retirement plans. For plan years beginning on or after January 1, 2021, part-time workers age 21 and older who log at least 500 hours annually for three consecutive years generally must be allowed to contribute to qualified retirement plans. (The previous requirement was 1,000 hours and one year of service.) However, employers will not be required to make matching or nonelective contributions on their behalf.
Benefits for small businesses
In 2019, only about half of people who worked for small businesses with fewer than 50 employees had access to retirement benefits.1 The SECURE Act includes provisions intended to make it easier and more affordable for small businesses to provide qualified retirement plans.
The tax credit that small businesses can take for starting a new retirement plan has increased. The new rule allows a credit equal to the greater of (1) $500 or (2) $250 times the number of non-highly compensated eligible employees or $5,000, whichever is less. The previous credit amount allowed was 50% of startup costs up to $1,000 ($500 maximum credit). There is also a new tax credit of up to $500 for employers that launch a SIMPLE IRA or 401(k) plan with automatic enrollment. Both credits are available for three years.
Effective January 1, 2021, employers will be permitted to join multiple employer plans (MEPs) regardless of industry, geographic location, or affiliation. “Open MEPs,” as they have become known, enable small employers to band together to provide a retirement plan with access to lower prices and other benefits typically reserved for large organizations. (Previously, groups of small businesses had to be related somehow in order to join an MEP.) The legislation also eliminates the “one bad apple” rule, so the failure of one employer in an MEP to meet plan requirements will no longer cause others to be disqualified.
Goodbye stretch IRA
Under previous law, nonspouse beneficiaries who inherited assets in employer plans and IRAs could “stretch” RMDs — and the tax obligations associated with them — over their lifetimes. The new law generally requires a beneficiary who is more than 10 years younger than the original account owner to liquidate the inherited account within 10 years. Exceptions include a spouse, a disabled or chronically ill individual, and a minor child. The 10-year “clock” will begin when a child reaches the age of majority (18 in most states).
This shorter distribution period could result in bigger tax bills for children and grandchildren who inherit accounts. The 10-year liquidation rule also applies to IRA trust beneficiaries, which may conflict with the reasons a trust was originally created.
In addition to revisiting beneficiary designations, you might consider how IRA dollars fit into your overall estate plan. For example, it might make sense to convert traditional IRA funds to a Roth IRA, which can be inherited tax-free (if the five-year holding period has been met). Roth IRA conversions are taxable events, but if converted amounts are spread over the next several tax years, you may benefit from lower income tax rates, which are set to expire in 2026.
If you have questions about how the SECURE Act may impact your finances, this may be a good time to consult your financial, tax, and/or legal professionals.
1) U.S. Bureau of Labor Statistics, 2019
The foregoing is provided for information purposes only. It is not intended or designed to provide legal, accounting, tax, investment or other professional advice. Such advice requires consideration of individual circumstances. Before any action is taken based upon this information, it is essential that competent individual professional advice be obtained. JAS Financial Services, LLC is not responsible for any modifications made to this material, or for the accuracy of information provided by other sources. This legislation maybe revised to correct errors and/or clarified.
