The IRA opportunity for late 2020

If you have a Traditional Individual Retirement Account (IRA), you might be familiar with the regulation to take required minimum distributions (RMDs) beginning at age 72. You may even know when the first and subsequent distributions must be made. If you have an Inherited Traditional or Inherited Roth IRA from prior to 2020, you might also have the ability to take RMDs in accordance with the stretch IRA strategy.¹ What you may not know, however, is how that the Coronavirus, Aid, Relief and Economic Security (CARES) Act provides valuable RMD flexibility for 2020.

RMDs—what they are and whom they affect

First, let’s set the foundation. In regard to IRAs, the RMD is the minimum amount you must withdraw from your account each year, and it applies to Traditional, SEP, and SIMPLE IRAs. Roth IRA owners don’t have RMDs. However, beneficiaries of Inherited Roth and Inherited Traditional IRAs generally have RMDs if the owner died in 2019 or prior. You may be subject to an IRS 50% excise tax for every dollar under-distributed, making it important to keep track of the rules.

Your first RMD as a Traditional, SEP or SIMPLE IRA owner must be taken by your required beginning date (RBD) which is generally April 1 following the year you turn age 72. If you don’t take your first RMD in the year you turn 72, you will have two due in one year: your prior year RMD you delayed until April 1 and your second RMD due by December 31, of the current year. You always have the option of taking the first RMD by December 31 of the year you turn 72 to avoid taking two in one tax year. In subsequent years, your annual RMD is due by December 31. Often IRA Custodians will help IRA owners meet the required dates by allowing them to set up automatic withdrawals.

Inherited IRA beneficiaries, regardless of the type, have annual RMDs if the IRA owner died in 2019 or earlier and they want to take advantage of the stretch IRA strategy. Beneficiaries can always withdraw more than the RMD. However, the advantage of taking only the minimum is that the rest of the investment remains in a tax-advantaged over a longer time frame.

The late 2020 opportunity

This year provides account holders with an unusual opportunity, courtesy of the CARES Act, which was passed in response to the COVID-19 pandemic. The act suspended all RMDs for 2020, including 2019 RMDs that were not taken in 2019 and had a required beginning date of April 1, 2020. RMDs for Inherited Traditional and Inherited Roth IRAs are also waived. While there are no RMDs in 2020, there will be RMDs due next year by December 31, 2021, unless Congress provides another RMD waiver.

IRA owners and beneficiaries now have three options heading into late 2020. 1) Skipping the RMD altogether— this could allow investments to compound tax deferred for a bit longer. 2) Taking a smaller distribution than usually required—this gives some of the benefits of the first option, while also providing an income. 3) Taking the usual distribution amount or more—for those that believe they’re in a lower tax bracket now than they’ll be in the future, a current distribution may result in long-term tax savings.

For some IRA owners and beneficiaries—such as those that need current income—the choice might be straightforward. Others, though, might find it worthwhile to discuss potential options with tax and financial advisors. Finally, for those who decide to skip or modify distributions for the year, be sure to suspend or modify any automatic withdrawal instruction you have on file with your IRA custodian.

¹ Stretching an IRA simply refers to the ability to take RMDs over the beneficiary’s single life expectancy (using the term-certain calculation method) rather than over the life expectancy of the original IRA owner. Under the SECURE Act, Inherited IRAs are to be emptied by the 10^th calendar year following the year of death of the IRA owner. The change is effective for IRA owners who pass away after December 31, 2019, and does not apply to certain eligible beneficiaries.

This article was written by a third party and provided to you by Marco Fragnito, Managing Principal and Robert Fragnito, Financial Advisor at MCF Capital Management, LLC in Laguna Hills, CA at 949 472 4579.

Investments in securities and insurance products are: NOT FDIC-INSURED/NOT BANK-GUARANTEED/MAY LOSE VALUE

First Clearing is a trade name used by Wells Fargo Clearing Services, LLC, Member SIPC, a registered broker-dealer and non-bank affiliate of Wells Fargo & Company.

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The opinions expressed here reflect the judgement of the author(s) as of this date and are subject to change without notice. Information presented here is for informational purposes only and does not intend to make an offer, solicitation, or recommendation for the sale or purchase of any product, security, or investment strategy. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed here. The information being provided is strictly as a courtesy.