Important IRA Changes 2020
The Coronavirus Aid, Relief, and Economic Security (CARES) Act, the largest economic relief bill in U.S. history, was enacted on March 27th. In addition to providing stimulus checks to many Americans up to $1,200 per adult and $500 per child, the bill also contains several provisions relating to Retirement Accounts which we highlight below. Additionally, the Setting Every Community Up for Retirement Enhancement (SECURE) Act became effective January 1, 2020.
- No Required Minimum Distributions required in 2020
- Penalty-free (and possibly tax-free) IRA distributions up to $100,000 for qualifying individuals
- Minimum Age moved from 70 ½ to 72 for Required Minimum Distributions
- New Inherited IRAs must now be fully distributed over ten years
Required Minimum Distributions
As a result of the CARES Act, the need to take Required Minimum Distributions (RMDs) in 2020 from any type of retirement plan has been waived. This may allow you a one-time opportunity to save on paying income taxes and allow more dollars to remain in your IRA for growth. Distributions that have already been taken in 2020 from a Traditional or Roth IRA (but not an Inherited IRA) may be rolled back into the IRA within 60 days of the distribution (subject to the once-per-year rollover rule). Please contact us if you would like to discuss making changes to your 2020 IRA distributions.
In addition, individuals directly affected by the Coronavirus may qualify to take early (before age 59 ½), penalty-free distributions up to $100,000. Importantly, you also have the option to repay these funds over a three year period without incurring income tax on the distribution. If the distribution is not repaid within three years, the withdrawal will be taxed at ordinary income tax rates over a three-year period.
It is interesting to note that while the SECURE Act changed the minimum age for mandatory IRA distributions, it did not affect the age of 70 1/2 at which account holders can make Qualified Charitable Distributions (QCDs) from their IRAs. Beginning this year, however, the $100,000 annual QCD limit will be reduced by the aggregate amount of deductible IRA contributions that are made after age 70 ½.
Speaking of charitable contributions, the CARES Act also allows a $300 above-the-line tax deduction for charitable contributions made by taxpayers who no longer itemize deductions. Taxpayers can take this deduction in addition to their standard deduction. Note that if you are already itemizing deductions, you cannot also take this deduction.
The SECURE Act increased the RMD age from 70 1/2 to 72 for purposes of taking mandatory retirement plan distributions (excluding Roth IRAs which do not require RMDs during the account holder’s lifetime). This change applies to anyone born on or after July 1, 1949. Non-spouse individuals who inherit an IRA (including Roth IRAs), however, must begin taking RMDs, regardless of their age, over ten-years. The SECURE Act also repealed the age restriction on contributions to traditional IRAs so wage earners may continue making contributions after age 70 1/2.
Items to Review
Given the uncertainty of our current environment, now is a great time to check the beneficiaries of your IRA and other retirement plans to make sure they reflect your current wishes. It is very easy to make changes to your IRA beneficiaries and for those of our clients with Schwab IRAs, we can provide you with a simple Beneficiary Change Form. We also encourage everyone to periodically review their Wills, Trusts and other estate plan documents to determine if updates or other changes are warranted. Finally, it is important to provide us with copies of any changes so that the information we have on file is accurate and complete.
We Are Here To Help
While Covington is being careful to adhere to all Covid-19 guidelines and regulations, we continue to be available every day from our virtual offices to provide assistance and answer any questions you may have. Like all of you, we look forward to the day when our country is able to declare victory over this devastating disease and life can return to normal. Until then, Covington remains committed to our mission to help safeguard and grow your investments, perform financial planning and provide guidance in such areas as your estate plan and taxes. Please feel free to contact us at any time!