On March 27, the massive “Coronavirus Aid, Relief, and Economic Security Act,” or the “CARES Act,” was signed into law. The CARES Act includes a waiver of required minimum distributions (RMDs) for 2020. This waiver applies to company savings plans and IRAs, including both traditional and Roth inherited IRAs.The waiver of RMDs for 2020 has raised many questions. One question that we have been hearing a lot is: What is the effect of the waiver on the “first money out” rule?How the First Money Out Rule WorksThe first money out rule says that the first money you take out of your IRA or plan in a year when you have to take an RMD is considered to be your RMD for the year. An RMD cannot be rolled over or converted.
Like most people’s lives, the retirement world is upside down. This is made evident by a single statement: “Required minimum distributions (RMDs) can be rolled over.”Yes, that is the new normal – at least for this year. RMDs are considered the first money out of an IRA and workplace plan. Typically, these dollars are ineligible to be rolled over to either another plan or IRA. The RMD always had to be taken first. If an RMD was erroneously rolled over, it was an excess contribution and the appropriate fix-it steps had to be followed.But those hard-and-fast rules are no more for 2020. As we have written in the Slott Report, the “Coronavirus Aid, Relief, and Economic Security Act,” or the “CARES Act,” was signed into law on March 27. The Act includes a waiver of RMDs for this year from company savings plans and IRAs. In addition, the CARES Act impacts 2019 RMDs for those who reached age 70 ½ in 2019 and have a required beginning date of April 1, 2020.
Question:The virus pandemic has prompted legislation that has eliminated the requirement for me to take a required minimum distribution (RMD) from my IRA for the year 2020. Am I therefore allowed to do a partial Roth IRA conversion in 2020 without having to take 2020 RMD first?Answer:Yes. The CARES Act RMD waiver for 2020 means you are not required to receive your RMD before doing a Roth IRA conversion in 2020 – or at any time. The same rule applies to any 2020 IRA rollover for anyone who would normally have an RMD due.
The recently-enacted “Coronavirus Aid, Relief, and Economic Security Act,” or CARES Act, includes special tax relief for IRA and company plan withdrawals made in 2020 and for company plan loans.Who gets relief? Both the distribution and plan loan relief apply only to “qualified individuals.” Not everyone meets this definition. The definition includes:· individuals diagnosed with the SARS-CoV-2 or COVID-19 virus by a test approved bythe CDC;· individuals whose spouse or dependent is diagnosed;· individuals who experience “adverse financial consequences” on account of:> being quarantined;> being furloughed or laid off or having work hours reduced;> being unable to work due to lack of child care; or> closing or reducing hours of a business owned or operated by the individual.The law gives the Secretary of the Treasury the authority to expand this definition.
As the coronavirus pandemic has spread, many Americans have been hit hard. Their retirement accounts have also taken a serious blow as markets have plummeted. In these tough times, there is a bit of good news as the government has come through with some relief for retirement savers.IRA Deadline Extended until July 15The IRS has extended the tax-filing deadline for 2019 federal income tax returns from April 15 to July 15. The extension of the tax-filing deadline also postpones the deadline for making 2019 prior-year contributions to traditional and Roth IRAs from April 15 to July 15.
Question:With the COVID-19 changes to push the tax filing back to July 31st, can someone still make a 2019 contribution until that date or do all contributions need to be made by the usual April 15th deadline this year?JerryAnswer:Hi Jerry,This is a question we have been getting a lot!The IRS has confirmed that the deadline for making both traditional and Roth IRA prior year contributions has been delayed to July 15, along with the tax-filing deadline.
By their nature, small businesses struggle in the shallows. Now they face a tsunami. However, when the shutters are removed and customers return and the employees are back on the payroll, normal day-to-day concerns will be a welcome relief. My guess is that many small business owners will create improvements, look to reward dedicated employees, and try to build a better safety net for themselves and their teams should another calamity strike. We could see this materialize in the establishment of more retirement plans.A recent editorial suggested that plan participants be allowed to invade their workplace retirement accounts – without penalty – as a financial crutch during the coronavirus shutdown.
By their nature, small businesses struggle in the shallows. Now they face a tsunami. However, when the shutters are removed and customers return and the employees are back on the payroll, normal day-to-day concerns will be a welcome relief. My guess is that many small business owners will create improvements, look to reward dedicated employees, and try to build a better safety net for themselves and their teams should another calamity strike. We could see this materialize in the establishment of more retirement plans.A recent editorial suggested that plan participants be allowed to invade their workplace retirement accounts – without penalty – as a financial crutch during the coronavirus shutdown.
It’s common for IRA owners to leave their assets to multiple beneficiaries – for example, their children. Before the SECURE Act, it usually made sense to split the IRA into separate accounts either before or after death. That’s because beneficiaries could stretch payment of their shares over their life expectancy. But, if there were multiple beneficiaries and the account was not split, each beneficiary was required to use the life expectancy of the oldest beneficiary – the one with the shortest life expectancy. Splitting accounts allowed each beneficiary to use her own life expectancy.Under the SECURE Act, most non-spouse beneficiaries must use the 10-year payout rule, which requires the entire IRA to be emptied by December 31 of the tenth year following the owner’s death. No annual distributions are required. Life expectancy is no longer used to calculate payouts for beneficiaries subject to the 10-year rule.
Question:A daughter who has been diagnosed with rheumatoid arthritis is listed as the beneficiary on her father’s Roth IRA. Does this disease qualify as a “chronic illness” for purposes of the exception to the 10-year rule? Is there a definition that the IRS uses for chronic illness? If she doesn’t take the inherited IRA after 10 years but withdraws it based on her life expectancy, will the IRS send a letter to her where she has to prove chronic illness? If the IRS doesn’t agree, what will they assess her since the amount is not taxable?Answer:There is no list of illnesses that qualify as “chronically ill.” Instead, to meet the criteria as a chronically ill individual under the SECURE Act, the daughter must be certified (by a licensed health care practitioner) to be unable to perform at least 2 activities of daily living for at least 90 days, or require “substantial supervision” due to a severe “cognitive impairment.”
