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Covid-19 Tax Break Suspends Required Minimum Distributions

(June 16, 2020; 10 p.m. EST) Federal emergency aid legislation suspends required minimum distributions (RMD) for 2020. If you do not need the income from your IRA or retirement plan, here are tips to maximize the benefit and build your retirement income portfolio.

Background: Before 2020, individuals were required to take withdrawals annually from federally qualified retirement accounts at age 70½. The amount of your distribution is based on an actuarial calculation of life expectancy published by the Internal Revenue Service.

What’s New. CARES Act, which became effective March 27, 2020, waives RMDs for 2020. If you don’t need the distribution to pay expenses or debt, you may elect to skip your distribution for 2020.

Roll It Over. Rolling over the distribution into your plan defers the taxes and extends effectively tax-free compounding of a distribution that otherwise would have been taxable income. But there is a better idea.

Roth It! Use the distribution you expected to be your RMD to fund a Roth IRA. You maximize tax savings by directing the amount you had expected to withdraw into a Roth IRA. Effectively, you convert those RMD assets into a tax free income stream. This can benefit you, your spouse and your IRA beneficiaries. Distributions taken as RMDs are taxable, distributions taken from a Roth IRA are not!

Complications. If you already took a required distribution in 2020, it's not too late to act.

In this period of social distancing, many individuals 65 and older are staying home and their expenses are lower than expected. Optimizing the 2020 waiver on RMDs from IRAs and qualified plans, such as 401(k)s, 403(b)s, and defined benefit (DB) plans, may require planning beyond the scope of this article. We welcome your questions about how to evaluate your personal situation.