SECURE, CARES and Retirement Account Distributions in 2020
Both the SECURE Act enacted in December 2019 and the CARES Act enacted in March 2020 changed the rules governing distributions from retirement plans and IRAs. Under the SECURE Act, retirement plan participants and IRA owners no longer have to begin taking distributions until April 1 of the calendar year after they reach age 72 (rather than the year after they reach age 70 ½). As described in more detail below, the CARES Act generally suspended required distributions for 2020. In addition, IRS guidance issued on April 9, 2020 (Notice 2020-23) and on June 23, 2020 (Notice 2020-51) provided relief for taxpayers who already took distributions in 2020 that are no longer required as a result of the enactment of the CARES Act.
In light of these two new laws and the recent IRS guidance, we recommend that retirement plan participants and IRA owners consider the following:
Foregoing 2020 Distributions
Individuals who have not already taken distributions in 2020 should consider foregoing distributions this year provided they can afford to do so.
Rolling Over or Repaying 2020 Distributions by August 31, 2020
Individuals who have already taken distributions in 2020 should consider “rolling over” an amount equal to what otherwise would have been their required minimum distributions into another qualified retirement plan or repaying that amount to the same IRA by August 31, 2020.
This includes someone who reached age 70 ½ in 2019 who, but for the CARES Act, deferred his or her required distribution for 2019 to 2020 and then took it in 2020.
In general, a plan participant or IRA owner may rollover a distribution (other than a required minimum distribution) to another retirement plan within 60 days. It is important to note that an IRA owner may not do this more than once in a 12-month period.
The CARES Act provides that an individual (other than an IRA owner who had already done a rollover within the preceding 12 months) who took a required minimum distribution in 2020 that was no longer required as a result of the CARES Act may roll over such distribution within 60 days. On April 9, 2020, the IRS issued Notice 2020-23, which provided relief to individuals who had taken a required minimum distribution in February or March 2020 (prior to the enactment of the CARES Act) by extending the deadline to rollover until July 15, 2020.
IRS Notice 2020-51, issued on June 23, 2020, provides additional relief to anyone who took a required minimum distribution in 2020 that is no longer required as a result of the CARES Act. Those individuals now have until August 31, 2020, to rollover any such distribution.
In the case of an IRA owner, if the individual returns the required minimum distribution to the same IRA by August 31, 2020, it will not be treated as a rollover for purposes of the “one rollover in 12 months” rule.
IRS Notice 2020-51 also provides relief to non-spouse beneficiaries of inherited IRAs. While such beneficiaries generally are not eligible to do a 60-day rollover, a non-spouse beneficiary of an inherited IRA who took a required minimum distribution that is no longer required as a result of the CARES Act may repay the distribution to the same IRA by August 31, 2020.
If income tax was withheld from a distribution that is to be rolled over or repaid, unless the financial institution where the account is held will reverse the withholding, the recipient will have to repay the amount of the withholding out of other money in order for it not to be taxable. The recipient may recoup the withholding by reducing future withholding or estimated tax payments, or by taking a credit on his or her income tax return.
Individuals who have traditional IRAs or 401(k) accounts and who expect to have less taxable income in 2020 than in other years may consider Roth conversions to take advantage of their lower income tax brackets in 2020.
Estate Planning Considerations
With a few exceptions, the SECURE Act eliminated the ability of beneficiaries who inherit retirement accounts to “stretch” distributions over their life expectancy. The law generally now requires them to withdraw all assets from the retirement account by the end of the tenth calendar year after the owner/participant’s death. Retirement plan participants and IRA owners may wish to review their beneficiary designations in light of these changes.
We offer the above information to alert you to important developments and their potential impact on your estate planning. Our recommendation regarding any specific actions to be taken will be based on each individual’s particular circumstances. We encourage you to contact your primary Kleinberg Kaplan attorney or a member of our Trusts & Estates Practice Group to discuss any questions or concerns you may have regarding the above or any other aspects of your estate planning.