With a third round of “stimmy” (as the kids say) hitting bank accounts for the past week, 90MM+ Americans (including some of us) are once again flush with cash. It remains to be seen what this will do for the economy, but combined with what seems to be a slow-but-steady sense of “reopening” in places that have been heretofore fairly closed … it might be that good things are ahead for the economy.
If you are one of those who may have received yours already, may I offer a reminder
If you don’t have an immediate need for that cash to pay bills, and you haven’t yet maxed out your traditional or Roth IRA contributions for 2020, you can still do so until April 15 (hint, hint).
But what about the other end of the retirement account equation?
That’s what I’ll be covering today.
Before I do so, a quick tax update for my friends:
If you received unemployment, you might have heard from me or others that the first $10,200 is NOT taxable. But here’s the good news: you do not have to amend a return to receive a refund if you already paid tax on that income.
Alright … time to get a little nerdy with these RMD thingies. This might be a perfect email to shoot along to somebody you know who might be impacted by them. We’re here to help.
How COV-19 Affected Annual RMD for Retirees
“The secret of change is to focus all of your energy, not on fighting the old, but on building the new.” – Socrates
If you have a retirement account, the IRS mandates that you begin withdrawing money from that account by a certain age. If you fail to start taking these withdrawals, called Required Minimum Distributions, or RMDs for short, the IRS will whack you with a tax penalty equal to 50% of what the annual RMD should have been.
This RMD requirement applies to most types of retirement accounts, including:
- Traditional IRA
- Simplified Employee Pension Plan (SEP IRA)
- Savings Incentive Match Plan for Employees (SIMPLE IRA)
If you have one of these types of retirement accounts, and you were born prior to July 1, 1949, you should have started taking money out by the time you reached age 70 1/2. Under the SECURE Act of 2019, however, nobody is required to start taking an annual RMD until age 72 if their 70th birthday comes after July 1, 2019.
This change in the required start of an annual RMD reflects the fact that people are living longer and, subsequently, likely to work longer before retirement.
Then along came 2020.
As part of the first pandemic relief effort, CARES Act I, passed in March 2020, RMDs for the year were waived completely. This waiver of required retirement account withdrawals applied to all individuals, including those that hold an inherited retirement account. And that’s some of you in New Haven County. This RMD waiver includes inherited Roth IRAs, which have no annual RMD requirement for the living account holder, but do have forced withdrawals upon inheritance.
While some pundits watched Congressional shenanigans with bated breath to see if additional COV-19 relief would include 2021 RMD waivers, this did not come to pass.
To be clear: RMD’s are back in force this year, and they must be planned for.
Over the course of this year and next, RMD dates are particularly important for those seniors that reach their 72nd birthday anytime in 2021. If that’s you, then you must:
- Take your first annual RMD by April 1, 2022.
- Take your second RMD by December 31, 2022.
- Take third and subsequent RMDs by December 31 of each following year.
Hmmm, two RMDs in 2022, eh? This can have a serious impact on your income tax planning for 2022, potentially creating a series of cascading issues (something those in our community might be concerned with). As such, you may wish to take that first annual RMD by December 31, 2021, in order to include it in this year’s income. This decision should not be made lightly and is certainly something we can sit down to discuss. https://waterbury-cpa.com/schedule/
In addition to waiving RMDs for 2020, the original CARES Act also provided an opportunity for making penalty-free early withdrawals from retirement plans. If you, your spouse, or a dependent or someone you know in were diagnosed with COV-19, or suffered financial hardship due to it, such as job loss, reduction in working hours, business closure, or the like, then you may be eligible for a COV-related retirement plan withdrawal.
Such a withdrawal for your annual RMD, up to a maximum of $100,000 must have been made by December 30, 2020. So, why am I discussing it now? Because if you did take a withdrawal last year due to financial difficulties, it’s not too late to plan for how you’ll treat it on your 2020 tax return.
Such a withdrawal would normally be subject to a 10% early withdrawal penalty (or the 25% tax on certain SIMPLE IRA distributions). Plus, you would normally need to pay income taxes on it for the year 2020.
But 2020 wasn’t a normal year, was it?
Thanks to the CARES Act, that 10% early withdrawal penalty is waived, and you can reduce the immediate tax shock by spreading the income tax hit over a three year period. This means that you’ll pay income tax on 1/3 of the withdrawal in 2020, another third in 2021, and the final third on your 2022 taxes. This is good news for many in the country, including those of us in our community.
Even better, if you took the distribution “just in case,” but ended up not needing all of the money, you can put the money back into your retirement account within three years with no tax impact.
If, like many retirees, you took your annual RMD at the start of 2020, before the pandemic hit, you can also take advantage of this three-year rule. You may either spread the tax bill over three years, or put that 2020 annual RMD back into your retirement account over the course of the three year window. The key factor is that you had a COV-19 diagnosis or COV-related financial hardship declaration.
RMDs and other tax implications associated with retirement accounts can be complicated.
So again, if you or someone you know in your circle or community who has questions about handling these, especially in relation to COV-19 relief rules, let’s schedule a chat:
We’re in your corner…
Emelia Mensa EA, CPA, CGMA