How to Skip Your Required Minimum Distribution in 2020
Retirees are usually required to take withdrawals from their retirement accounts each year after age 72. However, the Coronavirus Aid, Relief, and Economic Security Act allows you to skip your 2020 required minimum distribution from a 401(k), IRA, 403(b), 457(b) and inherited IRA. Here is what you need to know about delaying required withdrawals from a retirement account until 2021.
[Read: New Retirement Account Rules in Response to Coronavirus.]
Give the Stock Market Time to Recover
Withdrawing money from a depleted retirement account locks in your investment losses. Taking a retirement account distribution while the stock market is down can be particularly damaging to retirees who are no longer working and have no way to replenish their retirement savings.
"If the retiree does not need the money, I recommend taking advantage of not having to take the RMD in 2020," says Luis F. Rosa, a certified financial planner and founder of Build a Better Financial Future in Henderson, Nevada, and host of the "On My Way to Wealth" podcast. "It saves the retiree from having to take the money out of the account when the value is lower due to the recent stock market downturn."
Giving your investments time to recover some of their value before withdrawing your money can help your retirement savings last longer. "RMDs are based on the year-end value of the previous year. This means that the RMD for 2020 is calculated based on the value of the account as of December 31, 2019, before the stock market went down significantly," Rosa says. "The RMD will then be much higher as a percentage of the current value of the account if the assets in the account were invested in the stock market."
[See: How to Pay Less Tax on Retirement Account Withdrawals.]
Reduce Your 2020 Income Tax Bill
Distributions from traditional 401(k)s and IRAs are taxed as ordinary income. A retiree in the 24% tax bracket who withdraws $5,000 from an IRA must pay $1,200 in federal income tax on the distribution. If you postpone retirement account withdrawals until 2021, you can continue to defer paying income tax on your retirement savings.
"If a RMD is not necessary in order to maintain standard of living and retirees do not need the funds or can withdraw the necessary funds from another account, like a taxable account, then they should delay taking the distribution," says Andrew Langdon, a certified financial planner and founder of FivePoints Financial Planning in Peachtree City, Georgia. "This will lower their taxable income for 2020 and extend the tax deferral for another year."
Delay Distributions From Inherited IRAs
Beneficiaries who have inherited IRAs are usually required to take withdrawals every year, but are eligible to defer taking required distributions in 2020.
"For my clients that don't require the distributions to fund their lifestyle, I am certainly recommending that they delay until 2021, and this recommendation is true whether it is from their retirement account or an inherited IRA," says Laura I. Rotter, a certified financial planner and founder of True Abundance Advisors in Harrison, New York.
[Read: How to Protect Your 401(k) From the Coronavirus.]
Remember to Cancel Automatic Withdrawals
Failing to take a required minimum distribution usually triggers a massive 50% penalty on the amount that should have been withdrawn in addition to the income tax that is due on the distribution. To avoid the penalty, many people set up automatic withdrawals so they will never forget to take a distribution. However, if you are planning to skip your 2020 required minimum distribution, remember to turn off your automated withdrawal.
"If you currently are taking RMDs systematically, make sure to contact your financial advisor or investment management firm to stop the systematic distribution if you decide to skip it this year," Rosa says. "Just because the CARES Act allows you to skip it does not mean that your financial institution will automatically stop sending them to you." You may also want to set up new automatic withdrawals for 2021 and later years.
How to Undo a Required Minimum Distribution
The law that suspended required minimum distributions for 2020 was passed in March 2020. Some retirement account owners took a distribution before learning that they would be eligible to suspend distributions this year. If you took a withdrawal from your own account, you can roll over the money to an IRA or workplace retirement account within 60 days of the distribution.
"You could avoid paying tax on the distribution by rolling it into an IRA, provided you do this within 60 days of the withdrawal, and provided you only do this once within a 12-month period," Rotter says.
If the 60-day deadline for a rollover contribution falls between April 1 and July 14, you have until July 15, 2020, to put the funds in a retirement account.
"For those who took distributions beginning Feb. 1 and later, the 60-day rollover rule has been extended until July 15," Langdon says. "So if you took your RMD on Feb. 1, and the normal 60-day rollover window has passed, the IRS has extended this deadline until July 15. Those who took their RMD in January unfortunately are excluded from this extension. Owners of inherited IRAs are also excluded."
If you or a family member contracted COVID-19 or suffered financial hardship as a result of the coronavirus pandemic, the distribution might qualify as a coronavirus hardship distribution.
"If you were impacted by COVID-19, speak with your accountant about classifying the distribution as a COVID-19-related distribution," Rosa says. "This gives you the opportunity to spread the taxes over a three-year period or put the money back over a three-year period."
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