By Angel Nevis, CPA, Senior Tax Manager; Anu Joshi, CPA, Senior Tax Manager; Chris Madrid, CPA, Tax Director, ASL Family Wealth & Individual Tax Planning Group
ACTION REQUIRED BY AUGUST 31, 2020
If you have taken required minimum distributions from a retirement account in 2020 or are planning to, don’t miss this relief provision and potential tax-saving opportunity.
For the 2020 tax year only, RMDs from retirement accounts are not required. This includes distributions from traditional IRAs, SEP IRAs, SIMPLE IRAs, 401(k) plans, 403(b) plans, 457(b) plans, and profit-sharing plans. The waiver was recently expanded to include distributions from inherited IRAs, and also applies to certain taxpayers who reached RMD age in 2019.
For cash flow purposes, distributions can still be taken, but the latitude afforded in the 2020 CARES Act provides relief to those who would rather their retirement funds grow tax-free for another year. Forgoing a retirement distribution may also mean lower 2020 adjusted gross income and tax liability. Potential benefits could include increased allowable medical deductions or qualifying for an otherwise phased-out economic impact payment (stimulus check).
What if I have already taken my RMD?
Amounts that would have been an RMD, and that were taken as early as January 1, 2020, can be reversed. As long as the re-contribution/rollover is completed by August 31, 2020, the distribution will not be included in 2020 taxable income. Note that amounts in excess of the RMD do not qualify for this rollover benefit. The usual “one rollover per 12-month period rule” is also waived. For distributions received after July 1st the normal 60-day rollover period applies.
What about Qualified Charitable Distributions (QCDs)?
Qualified charitable contributions made directly from an IRA still receive favorable tax treatment in 2020 and can be a good option for taxpayers who are charitably inclined. Distributions transferred directly to qualified charities (up to $100,000 per individual) are not included in adjusted gross income. Likewise, no charitable deduction is allowed because the donation was made with tax-free funds. For those looking to maximize itemized deductions, 2020 may be a year to consider gifting cash or appreciated stock instead of a QCD.
Roth IRA Conversion Planning
Speaking of IRAs, if 2020 is expected to be a relatively low-income year due to losses or other impacts of COVID-19 relief, this may be a great time to consider a Roth conversion. There are many tax and financial advantages to investing in a Roth, including that future earnings and withdrawals can be distributed tax-free.
Roth conversions must be completed by December 31, 2020, to count for the 2020 tax year.
Each tax situation is unique and certain nuances in the law are beyond the scope of this article. For more information and planning guidance, please reach out to your engagement partner or a member of our Family Wealth & Individual Tax Planning Group.