When the Coronavirus Aid, Relief, and Economic Security (CARES) Act was passed on March 25, 2020 exactly two weeks after the World Health Organization (WHO) declared COVID-19 — also known as the coronavirus — a global pandemic, one key provision was the granting of a waiver for required minimum distributions (RMDs) for anyone with an RMD due in 2020. With no regulations surrounding RMDs, individuals were free to choose whether or not they wanted to withdraw money from their retirement plan, which meant some people could receive a much-needed tax break for 2020.
Previously, the Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019 mandated that any taxpayer with a qualifying plan — such as an IRA, 401(k), or 403(b) — who turned 70 and a half years old in 2019 would be required to withdraw their first RMD by April 1, 2020. If a retirement plan account owner did not take out an RMD, or withdraws too little, the remainder would be taxed at 50%.
By waving RMDs, the CARES Act relieved taxpayers in a year that has brought economic hardship to many Americans, as these individuals with retirement savings plans would not be taxed based on the fruitful economy that graced the end of 2019. (Last year’s economy is what determined 2020’s mandated RMDs.) They were freed from withdrawing an unnecessarily large percentage of their savings and from paying a tax bill that would not have been fair by its due date, which was amid the height of the COVID-19 pandemic’s economic repercussions.
In fact, this provision waiving RMDs was such a great advantage to taxpayers that AARP® opined in “CARES Act Waives Required Minimum Distributions From Retirement Accounts for 2020” that there was no substantial disadvantage to it. AARP® recommended that taxpayers take advantage of this unique opportunity, which has not been offered since 2009, by using its associated tax breaks to donate to charity or convert their plan to a Roth IRA. Instead of withdrawing an RMD, retirement savings plan account holders can withdraw the same amount in the form of an IRA fund and convert those funds into a Roth IRA at a low tax rate.
While the stock market has improved since its record lows at the beginning of the pandemic and the 60-day period for taxpayers to roll back any RMDs withdrawn before the CARES Act came and went on August 31, 2020, it is still possible to take advantage of the RMD waiver. The option to withdraw monies in the form of IRA funds at low tax rates remains available. Please note, however, that Roth IRA conversions cannot be reversed, so it is best to discuss all of your options with an experienced professional.
At Pearson Butler, our attorneys can help you navigate the impacts that the CARES Act has had on retirement savings accounts and use them as the United States government intended: to help you get back on your feet during this difficult time. Even amid the public health crisis posed by COVID-19, Pearson Butler retains a staff of experienced estate planning and tax law attorneys to assist you in making the best decisions for your retirement savings account. We understand how much work goes into building up a retirement plan. Let our renowned full-service Utah law firm help you keep your savings in great shape.
Contact Pearson Butler at (800) 265-2314 to schedule a free consultation.