An Updated Pass for 2020 RMDs

Managing taxes is completely boring to most people. This is understandable because the tax code is immensely complicated, there are frequent changes, and the language used is, well, anything but exciting. That said, the adage of “it’s not what you make, it’s what you keep”, is important to remember when saving for and living in retirement. To me this means not paying a penny more in tax than you have to.

As we end another wild quarter today, let’s look at an important change that could be an opportunity for some: RMD forgiveness in 2020.

Congress passed the CARES Act relief package during March in response to the coronavirus. Among its many provisions was one allowing folks to skip taking a Required Minimum Distribution (RMD) from their IRA during 2020. I think the idea was not to force folks age 72 and older to withdraw from accounts that were likely losing money. This was also geared toward older savers who are forced to withdraw from their IRA each year even though they may not necessarily need the money to spend. Maybe they have other savings and would prefer to leave their IRAs alone as much as possible.

Under the CARES Act Congress said that if you had already taken an RMD you could pay it back within 60 days. And if you hadn’t yet taken one you could skip it. RMDs are taxed as ordinary income in the year taken, so not being forced to take one means less tax to pay, maybe keeping you in a lower tax bracket, and potentially other positive ramifications.

This was great news except that Congress, in its infinite wisdom, started this as of February 1st, meaning RMDs taken during January wouldn’t qualify and would still be taxable. Congress also left out non-spousal beneficiaries who are required to take RMDs. This seemed unfair at the time, but the thinking was maybe Congress would come back and fix this problem later, as often happens after some time has passed and errors are noticed.

Well, last week the IRS beat them to it. The tax authority released guidance allowing all 2020 RMDs to be paid back by August 31st, regardless of who took them and when. It’s unclear what authority the IRS has to make this change, which seems to rewrite the law and is Congress’s job, but I don’t know if anyone will complain.

So, last week’s IRS update was meant to level the playing field for folks who can, one way or another, do without their RMD this year. If that’s not you, you don’t need to consider this at all.

But if it is you, it’s a good idea to reevaluate your RMD for 2020. Have you already taken one but can afford to pay it back? If you haven’t taken an RMD yet, do you financially need to do so? Avoiding it this year could save thousands in taxes while leaving your retirement savings to hopefully grow a little longer. This is tax management made simple, at least for this year.

Have questions? Ask me. I can help.

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