Congress delivered some financial relief for retirees in March, amid the COVID-19 economic disruption that sent the S&P 500 stock index plunging more than 33% that month. But confusion remains about the provision in the CARES Act that allows retirees to skip required minimum distributions (RMDs) this year.
It's a one-time waiver of the annual requirement that retirees 72 and over withdraw a portion of their traditional IRA or 401(k) and pay income tax on it. They're the government's way of finally collecting its share of retirement savings that's grown tax-deferred for decades.
While the Federal Reserve's recent downbeat forecast sent stocks in the Standard & Poor's 500 sliding nearly 6% on June 11th, as of Friday morning equities are still more than 35% above their March low. If the recovery holds, Colin Slabach, assistant professor of retirement at The American College of Financial Services says, “RMDS could be back to normal next year.” That said, if stocks take another deep slide, it’s possible that Congress might consider another waiver for 2021. "My guess is if they do cancel 2021 RMDs, the legislation won't pass until later this year or even in 2021," Slabach says.
To help you navigate the probable resumption of RMDs in 2021 — and possibly resolve your 2020 RMD strategy — here some answers to questions swirling around in retirement circles:
Would a 2021 RMD be based on Dec 31, 2020 balances?
Yes. The waiver this year is just that. Not a change in law, but a suspension for 2020. So next year if we're back to normal, your RMD will be an age-based percentage of your year-end 2020 balance. This is how it played out in the Great Recession: the RMD was waived for 2009, and when it resumed in 2010 it was based on year-end 2009 balances.
That said, the calculation for determining RMDs is scheduled to change in 2021. The Internal Revenue Service bases RMDs on life expectancy; its proposed new Uniform Lifetime Table has been updated to account for longer life expectancy. The change will be close to imperceptible on your finances. For instance, in 2019 a 75-year old had an RMD equal to 4.37% of a retirement account balance. In 2021, using the new updated Uniform Lifetime Table, a 75-year old’s RMD will be 4.07%.
Will the IRS double RMDs in 2021 to make up for lost revenue in 2020?
Highly unlikely. That didn’t happen in 2010.
Is there any downside to skipping my 2020 RMD?
No. But you might also want to consider if there’s an upside to taking it. Academic research has found that retirees who did a solid job of saving for retirement tend to spend less than what they can safely afford to withdraw.
There’s nothing inherently wrong with underspending, if you don’t have any need for the money right now, or want to leave more to your heirs. But at the same time, if taking your 2020 RMD — or even more if the numbers make that viable — gives you extra money for something meaningful and enjoyable, that seems like a worthy use. No?
If outright spending doesn’t appeal, Slabach says a Roth conversion is worth considering. For starters, given the big uptick in federal spending, he doesn’t expect today’s historically low tax rates to last long. (They are scheduled to expire at year-end 2025). When you convert money from a traditional IRA or 401(k) there will be tax due; if you agree with the notion that tax rates may head higher in the coming years, that’s an argument for paying more tax now. Moreover, a conversion reduces the pot of money that will be used to calculate future RMDs, and you’ve created tax-free money for yourself, or your heirs.
What if I took my RMD earlier this year?
The IRS announced on June 23 that anyone who took an RMD in 2020 has the opportunity to roll those funds back into their retirement account until Aug. 31, 2020. This change applies to inherited IRAs as well.
This story has been updated to reflect the newly announced Aug. 31 deadline to repay retirement funds withdrawn this year.
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