There are a lot of things vying for our attention these days: the coronavirus, vaccine opportunities, new Economic Impact Payments, the new tax deadline—all worthy topics. But when it comes to taxes, recent changes to retirement plan rules also shouldn’t go unnoticed.
How did the SECURE Act affect Required Minimum Distributions (RMDs)?
The established rules for RMDs were changed by the Setting Every Community Up for Retirement Enhancement Act, also known as the SECURE Act. The Internal Revenue Service says RMDs from certain retirement accounts now start at age 72. This includes the following account types:
- Traditional IRA
- Roth IRA (after the death of the plan owner)
- Simplified Employee Pension Plan (SEP)
- Savings Incentive Match Plan for Employees (SIMPLE)
- 401(k) Plans
- 403(b) Plans
- 457(b) Plans
- Profit sharing and other defined contribution plans
"Someone born on or before June 30, 1949, was required to start getting RMDs for the year they reached the age of 70½," says the IRS. "However, under the SECURE Act, if a person's 70th birthday is July 1, 2019, or later, they do not have to take their first RMD until the year they reach age 72."
How did the CARES Act affect Required Minimum Distributions?
The Coronavirus, Aid, Relief and Economic Security (CARES) Act made two major changes to RMDs for 2020:
- Waiving RMDs for the year, those
- who turned who turned age 70½ in 2019 and took their first RMD in 2020
- who reached age 70½ before 2020 and were still employed, but terminated employment in 2020
- Allowing RMDs to be treated as coronavirus-based distributions
The IRS says the RMD waiver was implemented "so seniors and retirees, including beneficiaries with inherited accounts, were not required to take money out of IRAs and workplace retirement plans." And RMDs are allowed to be treated as coronavirus-based distributions in the following situations:
- An owner or beneficiary of an IRA who received an RMD in 2020 had the option of returning it to their account or qualified plan to avoid paying taxes on the distribution.
- RMDs in 2020 not rolled over or repaid could be eligible to be treated as coronavirus-related distributions if the individual is qualified.
- A 2020 RMD that otherwise qualifies as a coronavirus-related distribution may be repaid over a 3-year period or have the taxes on the distribution spread out over three years.
- A withdrawal from an inherited IRA can also be considered a coronavirus-related distribution. The income from the withdrawal can be spread over three years for income inclusion, but the withdrawal cannot be repaid to an inherited IRA.
The IRS also notes that "special plan loans made to qualified individuals … [allowed plans to] suspend loan repayments for up to one year, although, typically, repayments resumed in January 2021." Any plan allowing the one-year repayment suspension "effectively gives up to six years (instead of five) to repay a typical plan loan."
What are coronavirus-based distributions?
The IRS says that the coronavirus-based distributions created by the CARES Act "provided account holders favorable tax treatment for certain withdrawals from retirement plans and IRAs, including expanded loan options." Generally, this meant being able to choose whether distributions taken in 2020 would be treated as income or a tax-free loan—even granting flexibility on how the tax owed or loan was repaid.
Here's what the IRS has to say about distributions treated as income:
- These distributions are not subject to the 10 percent additional tax on early distributions (including the 25 percent additional tax on certain SIMPLE IRA distributions).
- Taxes on coronavirus-related distributions are includible in taxable income:
- Over a three-year period, one-third each year, or
- If elected, in the year you take the distribution.
- Coronavirus-related distributions may be repaid to an IRA or workplace retirement plan within three years.
As for retirement plan distribution loans, they will remain tax-free if paid back to an eligible retirement plan within three years.
How do coronavirus-related distributions affect loan offsets?
The IRS says that retirement plan holders who "had an outstanding loan balance … when [they] left employment" have two options for dealing with loan offsets:
- For loan offsets in 2020, recipients have until the due date of your tax return (plus extensions) to repay that amount to another retirement plan or IRA.
- A qualified individual can treat the loan offset as a coronavirus-related distribution and have three years to repay to an IRA or include in income tax ratably over three years.
What are the deadlines for RMDs in 2021 and 2022?
The IRS lists the following RMD deadlines for 2021 and 2022:
- Individuals who reached 70½ in 2019 or earlier … will have an RMD due by Dec. 31, 2021
- Individuals who did not reach age 70½ in 2019 [but] will reach age 72 in 2021 will have their first RMD due by April 1, 2022 and their second RMD due by Dec. 31, 2022
There are two exceptions for the April 1, 2022 deadline: Workplace retirement plan holders generally don't have to withdraw an RMD until April 1 of the year they retire (does not apply to traditional IRA accounts), and retirement account holders facing two required distributions in 2022 can elect to instead take the distribution in 2021.
The IRS also listed some reminders for IRA trustees, who the agency says are required to do one of two things for account owners:
- Report the amount of the RMD to the IRA owner, or
- Offer to calculate [the RMD] for the owner.
If opting to calculate the RMD, trustees need to be careful:
- Calculating the amount of the RMD depends on the type of IRA or if they are from multiple accounts.
- Not taking a required distribution, or not withdrawing enough, could mean a 50% excise tax on the amount not distributed.
The IRS recommends that employees of public schools and certain tax-exempt organizations "check with their employer, plan administrator, or provider to see how to treat these accruals."
For more information on RMDs and coronavirus-related distributions, see Publication 590-B, Distribution from Individual Retirement Arrangements; and Coronavirus Relief for Retirement Plans and IRAs.
Source: "Tax Time Guide: IRS reminds taxpayers of recent changes to retirement plans," IRS.gov