Should clients take the RMD holiday in 2020?

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I’ve been spending a good deal of time lately with retiree clients who are wondering why I’m advising them to skip their required minimum distributions from their retirement accounts this year, as allowed by the much-discussed CARES Act.

The act — passed on March 27 in response to the dire economic consequences of the coronavirus shutdown — permits retirees the option of not taking required minimum distributions from their IRAs, 401(k)s and other retirement accounts for 2020.

The decision to skip or not to skip the RMD presents an unfamiliar scenario, simply because no one has ever faced this exact choice. Many retirees are wondering if it’s the right thing to do, and their advisors are in the position of helping them make an unusual decision amid completely unprecedented circumstances. In my opinion, however, skipping the RMD for 2020, if the client can afford to do so without sacrificing quality of lifestyle, is the right thing to do.

Let’s start with an example that is typical of many of my thriving retirees — individuals with a solid base of investments, including well-funded retirement accounts. As we know, RMDs are calculated based on account balances at year-end, and 2019 was a pretty good year in the markets. One of my client’s RMD for 2020 came out to just over $108,000.

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But then stocks dropped sharply in February and March, reducing my client's account balance. If that same RMD were calculated on the present balance, it would have fallen by around 13%, to only about $94,000. That means that if he decides to suspend the RMD for this year on the basis of that balance, it could save him almost $15,000 in taxable income. Not only that, but he’d get the tax-deferred compounding effect on that money in the account for another year, instead of having to pay taxes on it. And, if the markets turn back positive by the end of the year, he’ll have that much more invested and enjoying the updraft. Finally, this thriving retiree has sufficient assets that skipping this RMD should not have overly negative lifestyle implications. Accordingly, I advised him to skip the distribution for this year.

But what about the situation in which a client has already taken all or a portion of their RMD for this year? We all know those clients who value promptness in all things and may have pulled the trigger on their distribution before the news came down about the option of skipping the RMD for 2020. Is there anything they can do?

In certain cases, the answer is yes. Unfortunately, they can’t just reverse it by sending the money back. But if they haven’t taken the full amount for the year yet, you may want to consider advising them to not take any additional payments for 2020. Certain clients may also be able to roll the distribution over into an IRA if it has been less than 60 days since they received it because, thanks to the CARES Act, the 2020 distribution may not technically be characterized as an RMD, but rather as an eligible rollover distribution — though IRS guidance on this matter is still evolving.

Note that the rollover strategy isn’t available to those who received IRAs or other retirement accounts as beneficiaries (except for spouses), but the exemption for taking the distribution in 2020 still applies as long as no distribution has yet been made. Note also that those who were taking their first required RMD in 2019 were able to defer that first payment until April 1. For those who chose to defer and didn’t take the RMD in 2019, the waiver also applies.

Another factor to keep in mind: Due to the coronavirus pandemic, the deadline for completing rollovers was extended from April 1 to July 15 for this year — providing some taxpayers with a little more time to complete a rollover instead of taking the RMD. Some taxpayers could request a reclassification of the RMD as a coronavirus-related distribution, which would allow up to $100,000 to be repaid to the plan, avoiding tax liability for the money (here again, though, guidance is evolving, so in all cases you should recommend that they check with their tax advisor.)

The 2020 exemption from mandatory RMDs also applies to inherited retirement accounts, by the way, which could be good news for younger clients who don’t really need the extra income.

Of course, you may have clients who depend on their RMDs to maintain their lifestyles. In that case, they should go ahead and take a distribution.

But for this unusual year you may want to recommend that they take a smaller-than-usual percentage from their accounts. Given the ongoing uncertainty surrounding the markets and the possibility – at least – of a resurgence of the virus later in the year, it’s not a bad idea to encourage your retired clients to conserve resources this year as we wait for more clarity.

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CARES Act Retirement planning 401(k) RIAs Client strategies