Congress has granted financial relief to retirees in the face of coronavirus economic turmoil that has sent the S&P 500 stock index tumbling more than 30% in a month. Confusion remains, however, over a provision in the CARES Act that allows people to waive the compulsory minimum distribution for a year. This is a requirement only for retirees aged 72 and over to withdraw at least $1,000 of their retirement income and pay income tax on it.
It has been a tumultuous time for the US stock market and the economy at large, as the Fed’s decision to buy billions of dollars of investments and inject funds to banks.
If the recovery continues, the RMDS could return to normal next year, but not before 2021. According to the Federal Reserve’s latest forecast, the RMD would be based on the balance sheet of December 31, 2020. However, if stock prices fall again, Congress may consider an exemption until 2021. Even if they are abolished in 2020, the law will not be passed until the end of the year or even the first quarter of 2021.
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The calculations that determine the RMD will change in 2021, and the Internal Revenue Service’s (IRS) new proposed tax code will be updated to take into account a longer life expectancy.
The change will be barely noticeable to those with small retirement accounts. For example, a 75-year-old retiree in 2019 would have 4.37% total account balance. By 2021, according to the new updated life table, his RMM will be about 4%.
The IRS won’t likely have people make up for lost revenue or distributions in 2020. It was not the case in 2010.
Are there any problems skipping a 2020 RMD?
There are no significant disadvantages to skipping the RMD 2020 other than not having the funds for things.
Research has shown that pensioners who have saved solidly for retirement tend to spend as much as they can safely afford to live on.
If this you have excess funds, you may want to convert your accounts to a ROTH IRA. You will pay taxes on the amount converted, but it decreases the amount you need to calculate for future RMDs and pass to your heirs’ tax-free. Given the government’s increased spending, this could potentially be a huge benefit to both you and your heirs because taxes are expected to increase.
What if you already took an RMD for 2020?
The good news is that the IRS announced that anyone who took an RMD for 2020 has until August 31, 2020, to roll the funds back into the retirement account.