Did You Know? You Don't Have to Take RMDs in 2020

Among the important provisions of the Coronavirus-related CARES Act are waivers for Retirees with withdrawals due in 2020 from their 401(k), 403(b) or an IRA all qualify (as do their beneficiaries).

Among the important provisions of the Coronavirus-related CARES Act are waivers for 2020 Required Minimum Distributions (RMDs). Retirees with withdrawals due in 2020 from their 401(k), 403(b) or an IRA all qualify (as do their beneficiaries). And, yes, the waiver includes those who turned 70½ in 2019 and had to take their first RMD by April 1, 2020. Watch the video here.

Why is this Helpful?

Why is this waiver helpful?

Most 2020 RMDs are based on retirement account values at year-end 2019. At that point in time, the Dow Jones Industrial Average (DOW) stood at 28,538, near its historical high. I know, I know. It hard to remember that high considering our new reality. Today’s DOW opened at 20,820… over 7,700 points below the 2019 close. Without this timely waiver, in all likelihood, retirees would have to sell a greater percentage of their 401(k), 403(b) or IRA balance to meet the 2020 RMD threshold. The result would be the payment of taxes based on year-end 2019 values that have since significantly declined. With this waiver, Congress gave retirees more time to – hopefully – recover a portion or all of those losses. That, of course, may or may not happen, but hope springs eternal.

Any Downside?

Is there a downside to the waiver? Not really. Accepting the waiver is a choice, not a requirement. RMDs are the minimum amount retirees must take out in a given year. And, of course, they can always take out more than was initially required if need be. In fact, many retirees do just that. Fact is, the RMD suspension puts retirees in total control during the 2020 waiver period. They can withdraw some or none depending on their specific needs.

Unfortunately, about 80% of IRA owners will not benefit from this waiver. These retirees depend heavily on RMDs for annual retirement income. They will withdraw the required amount… and more… regardless (source: the U. S. Treasury). For the other 20%, it raises the question of whether or not to withdraw even if they don’t have a current need for the money. Why pay tax on withdrawals in 2020 if the income is not needed to make ends meet? There are other considerations, so read on.

Other Considerations

It never hurts to carefully review ones 2020 tax situation before deciding yea or nay. For whatever reason, you may find yourself in a lower tax bracket situation, offering the opportunity to take advantage of lower tax rates versus later years of “anticipated” higher tax rates.

Another thing to consider, because market values are now lower, 2020 might be a good time for a Roth IRA conversion. With the federal government taking on multi-trillion dollars of debt to battle the virus, it’s likely that both market values and tax rates are going to increase in the future.

Why A Roth Now?

RMDs cannot be converted to Roth IRAs (remember, you took a tax deduction when you contributed to that traditional IRA and by requiring RMDs if how Uncle Sam finally gets his cut). But under the waiver, there are no RMDs (in 2020). So, you can withdraw funds from the traditional IRA at the currently reduced value, pay the resultant lower amount of tax and then deposit those funds into a Roth IRA. Yes, I know, you pay taxes on the conversion (just like you would have on non-waived RMDs), but your RMD could not have been converted to a Roth. And even though you paid the tax on non-waived RMDs, you lost out on the conversion benefit. Now, during this 2020 RMD waiver period, you can get more for the taxes paid simply by being able to convert the withdrawn funds to a Roth IRA. In short, RMDs due for 2020 are waived, but you can take them if needed or simply to take advantage of the aforementioned tax planning opportunities.

Fair “Conversion” Warning!

I’m not a financial adviser, nor am I a professional tax adviser, but this seems to be an excellent opportunity to consider a Roth conversion. If you happen to be in that 20% category that doesn’t need the money, consult the experts and take a hard look at the conversion. But remember, once you convert to a Roth, it cannot be undone. The conversion is permanent, and the tax must be paid. The key factor in making a conversion decision is your own prediction of tax rates. If you expect your future tax rate in retirement to be the same or higher, a conversion should be to your advantage.

Roth v. Traditional IRA

While we’re on the subject, let me remind you of potential other benefits. Obviously, the amount converted to a Roth removes those dollars from your Traditional IRA, which decreases future amounts of taxable RMDs. And lowering your future taxable income might also lower the taxable percentage of your Social Security benefits as well as the amount taken out of your Social Security check for Medicare purposes. By the way, those Roth funds will also pass tax-free to your beneficiaries. And by converting to Roth funds when the market value is 20-30% (or more) lower means that any future rebound will accumulate tax-free; whereas, had you not converted, rebound gains in your traditional IRA will eventually be taxed at personal rates.