Many people’s estates typically include IRAs. Be aware that two major laws passed into law recently, the Setting Every Community Up for Retirement Enhancement (SECURE) Act and the Coronavirus Aid, Relief, and Economic Security (CARES) Act, have had a direct effect on IRAs.
In a nutshell, the CARES Act waives required minimum distribution (RMD) rules for IRAs (and certain defined contribution plans) for calendar year 2020. If you’re fortunate enough that you don’t need to make withdraws from your IRA, there’s an opportunity to leave more for your heirs in your retirement plan. However, bear in mind that because the SECURE Act generally put an end to “stretch” IRAs, the estate planning benefits of inheriting IRAs are somewhat muted.
RMD rules waived
Not taking RMDs in 2020 is particularly advantageous because the amount of the distribution is based on year-end 2019 account values. Otherwise, you might be forced to liquidate account assets at depressed values during the stock market downturn.
The waiver covers both 2019 RMDs required to be taken by April 1, 2020, and RMDs required for 2020. It applies for calendar years beginning after December 31, 2019.
What if you already took your RMD?
Great news you can repay those funds by August 31, 2020 and avoid taxation. Notice 2020-51 allows for repayment of the distribution from an IRA of the amount that would have been an RMD in 2020, if the funds are returned by August 31, 2020. This includes anyone who turned age 70 ½ in 2019 and would have had to take the first RMD by April 1, 2020. This waiver does not apply to defined-benefit plans. These repayments are treated as rollovers and are not subject to the one rollover per 12-month period limitation and the restriction on rollovers for inherited IRAs.
“Stretch” IRAs eliminated
Perhaps more important for some estate plans, the SECURE Act eliminates so-called “stretch” RMD provisions that have allowed the beneficiaries of inherited IRAs and defined contribution accounts to spread the distributions over their life expectancies. Younger beneficiaries could use the provision to take smaller distributions and defer taxes while their accounts grew.
Under the SECURE Act, most beneficiaries must withdraw the entire balance of an account within 10 years of the owner’s death. However, they don’t have to follow any set schedule. They can wait and withdraw the entire amount at the end of 10 years if they wish.
The new rules apply only to those inheriting from someone who died after 2019. Thus, if you inherited an IRA years ago, you won’t be subject to the new rules with respect to your RMDs. However, when your beneficiaries inherit the IRA from you, they’ll be subject to the new rules.
Review your plans
The changes made by the CARES Act and the SECURE Act may have an impact on your retirement and estate plans. We can help you review your plans to ensure that they continue to meet your objectives.