The COVID-19 crisis has brought hardship on businesses and families including layoffs, furloughs, and closing businesses. Many are asking, where will my next paycheck come from? The federal government is stepping in to help with the CARES Act. One way they are helping is by waiving required annual retirement account withdrawals and suspending the Required Minimum Distribution (RMD) rules for retirement accounts in 2020.
If you are a retirement account holder, this is one way to avoid taking money out of IRAs and 401(k)s this year while still having access to the funds you need. This change will help retirement account balances recover more quickly from recent losses when financial markets improve.
Here are some facts you need to know.
IRA and 401(k) Account RMDs
The CARES Act suspends RMD’s in 2020 for all retirement plans including IRAs and employer plans such as 401(k)s. Prior to the CARES Act, holders of retirement accounts were required to withdraw a percentage of their account balances each year once they reached age 72.
Required minimum distributions are typically based on the value of the retirement account at the end of the prior year. Because the stock market was near record highs in December and has experienced significant declines since, retirement account holders would have been forced to take RMDs based on higher values that no longer exist. Avoiding RMD’s this year will hopefully assist retirement plan portfolios to recover from recent Coronavirus-related stock market declines.
However, for some retirees who depend on their retirement account withdrawals to pay for daily expenses, the RMD holiday offers little or no benefit. These individuals need cash to cover their cost of living, so they’ll take their withdrawals regardless of the RMD holiday.
Delay RMDs for the First Two Years
Prior to the CARES Act, individuals that turned 70½ in 2019 would have been required to take their RMD in 2019 or by April 1, 2020*. Under these regulations, individuals that didn’t take the first year RMD in 2019 would have been required to take both the 2019 RMD and the 2020 RMD in 2020. The CARES Act’s suspension of RMDs allows such individuals to delay taking the first two years of RMDs until 2021.
Roth IRA Distributions
One of the advantages to Roth IRAs is that they have different distribution requirements than a Traditional IRA. Because Roth IRA’s are funded with after-tax dollars, account owners are not required to take RMDs during their lifetime. However, beneficiaries – other than a surviving spouse – must take RMDs. The CARES Act also provides a 2020 RMD holiday for these Roth IRA beneficiaries.
Help for Retirement Accounts
The CARES Act provides assistance to retirees during the COVID-19 crisis by suspending required minimum distributions for 2020. This waiver will hopefully assist retirement accounts to recover value lost due to recent financial market declines.
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