Senior Couple Calculating Budget

CARES Act and Your Retirement Opportunities

The CARES Act stimulus legislation passed this Spring offers tax opportunities for certain retirees.

As part of the stimulus legislation to combat the economic effects of the coronavirus pandemic, Congress suspended the mandated payouts (called required minimum distributions, or RMDs) this year for various retirement plans. These include IRAs and 401(k)-type plans. There will be no penalty for not taking an RMD this year. Normally, account owners who turned 70½ in 2019 or prior, or inherited-IRA beneficiaries of any age, had to take an RMD.  

The RMD withdrawal from the retirement plan is considered taxable income. Withdrawals of principal would be based on accounts’ December 31, 2019, value, when most assets had higher values. The suspension aimed to help retirement accounts recover from the financial market declines by not requiring withdrawals at a time when portfolios may have lost value.

Some of our clients take their RMDs early in the year to support their day-to-day living expenses or simply to ensure that the requirement is met. If you are not someone who needs the distribution and would prefer to avoid the taxable income, it may be possible to re-contribute the amount back into your retirement account before August 31st. Your accountant would be in the best position to advise you about what is the right option for you.

Another approach is to convert the already distributed assets to a Roth IRA. While both traditional IRA and Roth IRA investments grow tax-free, only withdrawals from Roth accounts are tax-free (since the taxes were paid upfront). In addition, there is no RMD requirement during your lifetime or that of the beneficiaries. Since the traditional retirement account RMD percentage required for future years increases as you age, some of our clients attempt to gradually and tax-efficiently transfer assets from traditional retirement accounts to Roth accounts.

For those who have not taken an RMD, one strategy being discussed in this year’s unique situation is to put some of the tax savings from not taking an RMD toward the tax cost of a Roth conversion. An accountant can help you calculate how much of your traditional IRA assets can be converted to a Roth IRA without being bumped into a higher tax bracket. Paying the tax this year may generate significant tax savings in future years.

Many of our clients depend on investment portfolios to fund their living expenses. We often work with their accountants and investment managers to balance personal needs with the financial market and capital gains considerations. If you typically use an IRA RMD as one of your funding sources, then it would be wise to speak with your financial advisor and accountant to determine whether drawing on non-retirement assets this year would be more tax efficient.

For those clients who need to be mindful of Medicaid income limitations, an elder law attorney could help you determine the impact of foregoing a distribution from your retirement account this year.

Please contact us if you would like assistance gathering the information for a productive conversation with your trusted advisors.

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