LGT's Profit Sense

Generally, individuals are required by law to take an annual withdrawal from their IRA, Simple IRA, SEP IRA, or other retirement plan vehicles such as a 401K plan once they reach age 72 (or 70 1/2 before 2020).  They have until April 1st of the following year after reaching the required RMD age to take their first RMD payment.  Every year thereafter, they must take the RMD by December 31st.

But the CARES Act, passed by Congress on March 27, 2020, waives the RMD payment requirement for 2020.  Additionally, the waiver covers the first RMD, which individuals may have delayed from 2019 until April 1, 2020.  If the 2020 RMDs had not been waived, individuals likely would have to withdraw a greater percentage of their plan balances AND owe a big tax bill on a value that no longer exists due to market losses sustained in the first quarter of 2020.

If an individual has already taken their 2020 RMD, the distribution is now eligible to be rolled over to an IRA or other eligible retirement plan within 60 days of the distribution.

A recently issued IRS notice widens this window of opportunity.  Individuals who took RMDs between February 1, 2020 and May 15, 2020 have until July 15, 2020 to roll over the money into an IRA account.   

It also bears reminding that you are only allowed one such rollover per twelve-month period.  Check with your financial provider to ensure you do not fall into this trap.

If an individual is younger than 59 ½ and takes a distribution from their retirement plan, they will be subject to a 10% early withdrawal penalty in addition to income tax on any distributions taken from IRA and other retirement plans.  The CARES Act waives the 10% penalty for 2020 for individuals experiencing COVID-19 financial hardships.  COVID-19 financial hardships include the following —

• You, your spouse, or dependent has been diagnosed with the coronavirus
• You’ve experienced adverse financial consequences as a result of being quarantined, furloughed, or laid off or your work hours have been reduced
• You’re unable to work because of a lack of child care
• You’ve had to close or reduce the hours of a business as a result of the virus
• You’ve been financially impacted by other factors determined by the Treasury

Withdrawals up to $100,000 made on or after January 1, 2020 would not incur the penalty.  To ease the tax burden, if you pull money from your retirement account, you have up to three years to pay taxes on the withdrawals. You can repay all or a portion of the distribution within three years, and the repayments will not be counted toward the annual contribution limits.

Please reach out to an LGT advisor about your specific situation before proceeding and also for assistance with the process. Stay informed about future developments by frequently visiting our COVID-19 Financial Updates page.