With all the talk about direct payments from the federal government and SBA loans created by the CARES Act, some very important news about Required Minimum Distributions (RMDs) has been largely overlooked. In response to the stock market drop due to the economic harm and uncertainty caused by the current coronavirus, Congress has made moves to waive RMDs for 2020 and permit some early withdrawals from retirement plans.
First, the most relevant change for many of our clients is in Section 2203 of the CARES Act. The legislation waives Required Minimum Distributions in 2020 for IRAs (including SIMPLE IRAs, SEP IRAs, etc.), 401(k)s, 403(b)s, and 457 plans. This means that individuals who reached 70 ½ by the end of 2018 will not have any RMDs in 2020 (including the April 1 deadline for an initial distribution) and will not have to sell stocks in their retirement plans this year (while the market is down) to be able to make distributions. The waiver also applies to inherited IRAs. For inherited IRAs where the owner died prior to 2020 and named a “designated beneficiary,” the 2020 Required Minimum Distribution has been waived. If the owner died from 2015 to 2019 without naming a “designated beneficiary,” the act gives the beneficiary an extra year to take distributions (six years instead of five years). For IRAs where the owner died on or after January 1, 2020, the act does not appear to extend the 10-year period for designated beneficiaries to take distributions or the 5-year period for non-designated beneficiaries.
Section 2202 of the Act allows penalty-free “coronavirus-related distributions” up to $100,000. The taxes on such distributions can be paid ratably over the course of three years, but the employee has the option of returning the funds to the retirement plan over the three years starting on the date of the distribution. A distribution is coronavirus-related if the person or a spouse or dependent has been diagnosed with the coronavirus or the related disease or experiences certain “adverse financial consequences” as a result of the outbreak. Although this section allows early withdrawals (before 59 ½) without penalty as an emergency source of funds, employees should avoid doing this if possible because of the financial hit they will take by selling when the market is down.
The CARES Act also made a couple of changes to charitable deductions. First, starting in 2020, Section 2204 permits taxpayers to take a charitable deduction of up to $300 per year even if they take the standard deduction. This rule applies to contributions to most charities, but appears not to apply to contributions to donor-advised funds. The Act has also raised the limits on deductible charitable contributions for 2020.
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