On March 27, 2020 the president signed the CARES Act as part of an effort to ease the adverse financial consequences of the COVID-19 pandemic. While a lot of attention has been paid to the unemployment benefits, the payroll protection plan (PPP), and other portions of the CARES Act, the relief Congress provided to those who must take required minimum distributions from their qualified retirement plans (which we’ll call IRAs), and beneficiary or inherited IRAs (which we’ll call inherited IRAs) received very little attention. The CARES Act provides that required minimum distributions have been suspended for the year 2020.
Under the Internal Revenue Code a person must take a minimum distribution from their IRA or qualified retirement plan by April 1 of the year following the year in which they turn age 72 ½ (new law under the SECURE Act). The required minimum distribution is calculated by taking the balance of the retirement plan as of December 31st of the prior year and dividing it by your life expectancy as calculated under the IRS tables. A required minimum distribution must be made prior to December 31st of the taxable year. For example, consider someone who has an IRA with a balance of $100,000.00 on December 31, 2019 and would be 75 in the year 2020. Using the uniform life expectancy table (which is used for people who own IRAs) someone who is 75 has a 22.9 year life expectancy. They would then divide $100,000.00 by 22.9 and the required minimum distribution for 2020 would be $4,366.81.
For inherited IRAs, (meaning someone who has inherited an IRA following the death of an IRA owner) their required minimum distribution is calculated by taking the December 31st balance of the previous year and dividing it by their life expectancy as calculated by the single life expectancy table (which is for those who inherit an IRA). In this scenario, someone who is 45 and has an inherited IRA would have a life expectancy of 38.8 years. If the inherited IRA balance as of December 31, 2019 was $100,000.00, they would divide this balance by 38.8 and the required minimum distribution would be $2,577.32.
It is important to note that this calculation of the required minimum distributions for inherited IRAs (as described above) is only for inherited IRAs received from people who died prior to December 31, 2019. For any person dying after January 1, 2020 an inherited IRA must be liquidated within 10 years (SECURE Act). Since the CARES Act only deals with required minimum distributions for 2020, all inherited IRA calculations would be based under the old rules.
The CARES Act was enacted on March 27, 2020 and suspended required minimum distributions for 2020 meaning that no required minimum distributions need to be made for the calendar year of 2020. There had been some doubt as to what people who had already taken their required minimum distribution prior to the enactment of the CARES Act would be able to do.
On June 23, 2020 under IRS Notice 2020-51, an IRA owner or a beneficiary under an inherited IRA who had taken a required minimum distribution from their IRA (not from a 401K) has until August 31, 2020 to essentially return the required minimum distribution already taken in 2020 back into the IRA or inherited IRA from which it was taken. It is important to note that only the required minimum distribution can be placed back, not any excess distributions that had been taken from the IRA or inherited IRA. This deadline is coming up fast, and those who did not need the required minimum distribution should consider making the payment back into the IRA as soon as possible, but no later than August 31, 2020. Please contact your accountant and/or financial planner immediately to determine the best mechanics for accomplishing this.