Why the IRS CARES About RMDs

When the IRS releases new IRA information, it’s dry, boring, and usually just a technical thing that your accountant needs to know about. This time, though, the IRS update has some real need-to-know kind of news. It’s about the CARES Act and it can affect you right now. Let’s start with a quick overview and then move on to the recent update. 

What is the CARES Act? 

The CARES Act - Coronavirus Aid, Relief, and Economic Security - is a sweeping bill that addressed many different economic elements. It was enacted to temper the ongoing economic decline due to the pandemic. Part of this bill addresses retirement plans specifically. 

How does the CARES Act affect retirement accounts? 

CARES includes four major changes that were intended to help those suffering financially. 

1. The first is that RMDs (Required Minimum Distributions) are suspended for 2020.  

2. The second is that if the individual qualifies, the 10% penalty on early distributions is not levied.  

3. The third is the amount that a plan holder can take out of a 401(k) as a loan is greatly increased. 

4. The fourth is a one-year delay in repayments of outstanding loans from a retirement plan. 

How does the RMD waiver help retirement investors? 

The purpose of RMDs is to ensure that American seniors use the retirement funds for the purpose they were intended, i.e. paying for retirement expenses. However, there can be times that taking money out of the retirement effect can have an outsized negative effect. One of those times is during a pandemic and the accompanying economic disruption. When the market is falling, retirement accounts are shrinking, and it can be unwise to deplete those reserves. This is especially true if you have to unload assets at the low point of their value. By pushing off RMDs, the government allows investors to retain those assets and give them a chance to regain in value. 

When does the RMD waiver expire? 

You need to consult with your accountant of financial professional to find out when you have to start taking out RMDs again. There are a number of factors involved and it pays to be on the safe side. 

The Big IRS RMD Update 

The IRS announced on June 23 that it’s allowing those who took a RMD for 2020 to roll it back in. That means if you had already taken the Required Minimum Distribution before the CARES act went into effect, you can still take advantage. Just put the funds back into your account by August 31, 2020, and you can effectively skip the RMD for this year.  

For more information you can read the IRS CARES-RMD article here.