Should You Forego Your 2020 RMDs?

By Generational Wealth Advisors

10/29/2020

The Coronavirus Aid, Relief, and Economic Security (CARES) Act, passed into law this year, includes a number of measures designed to stimulate the economy. One provision allows retirees to forego taking Required Minimum Distributions (RMDs) from IRAs or other defined contribution plans, such as 401(k) plans this year.

RMD amounts are based on the value of the account at the end of the previous year. Because some have accounts that will see a decline in value this year, the amount of the required withdrawal would be a larger percentage of a client’s retirement account under that scenario. The CARES Act will let retirees keep that money in their accounts, potentially recouping some of the market losses when the economy turns around and lower the 2020 tax bill for most taxpayers that do choose to forego their RMD this year.

This waiver for suspending RMDs for 2020 includes any retirement account subject to RMDs, such as IRAs, 401(k)s, Roth 401(k)s and inherited accounts.

If you are subject to RMDs, the waiver applies to you regardless of age. It includes original account owners over age 70½ (or age 72 under the SECURE Act), original account owners who turned 70½ in 2019 but have not taken their distribution yet, and inherited-IRA beneficiaries of any age. This waiver extends to inherited IRAs (including stretch IRAs).

Defined benefits plans are not eligible for this waiver, so if you’re supposed to take distributions from a defined benefit (DB) plan you must continue to do so.

The above are general rules of thumb, but there is also a flip side of thought to this. Tax rates under the Tax Cuts and Jobs Act of 2017 are historically low but are set to expire at the end of 2025. If the election brings the changes many have predicted, the likelihood of tax rate hikes occurring next year is a high probability. If so, it would make sense to consider taking the RMDs this year when the tax rates are potentially lower than they might be in future years and also to reduce the amount of future RMDs. It may make sense to consider a “bracket-filling” strategy to limit the amount of tax paid on withdrawals in 2020.

Since each client faces unique circumstances, it is important that you consult with your CPA or tax professional as early as possible to determine whether to take or waive your RMDs for 2020.

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