CARES Act Update: A Few Important Points About Required Minimum Distributions

First the SECURE Act and now the CARES Act have made important changes to the rules for required minimum distributions from individual retirement accounts and 401(k)s.

Just a few months ago, Congress passed the Setting Every Community Up for Retirement Enhancement (SECURE) Act, folding the popular retirement focused legislation into a bigger federal appropriations bill.

Among its many provisions, the landmark law made an important change to the rules governing “required minimum distributions,” or RMDs, drawn from individual retirement accounts (IRAs) and 401(k) plans. Namely, the SECURE Act established that an account owner must begin making withdrawals on “April 1 of the calendar year following the calendar year in which the individual attains age 72.” Previously, the date was April 1 of the calendar year following the calendar year in which the individual attained age 70 1/2.

At the time, industry analysts voiced strong support for this provision of the SECURE Act, suggesting the extra year and a half added to the RMD deadline should give Americans a meaningful amount of additional flexibility in their retirement income planning. They said Congress had taken an important step to recognize Americans’ improved longevity.

Under the SECURE Act, this amendment became effective for distributions required to be made after December 31, 2019, with respect to individuals who will reach age 70 1/2 after that date. As such, explaining this change to clients has been an important part of many retirement-focused advisers’ communication strategies for 2020. But with the outbreak of the coronavirus pandemic, there is now justifiably more attention being paid to the recently passed “CARES Act,” or the Coronavirus Aid, Relief and Economic Security Act, which also addresses the complex topic of required minimum distributions.

For its part, the CARES Act does away with RMDs for 2020, observes Mark Iwry, former Senior Advisor to the Secretary of the Treasury in the Obama Administration and currently nonresident Senior Fellow at the Brookings Institution, and Visiting Scholar at the Wharton School. This development should give advisers more time to educate their clients about RMDs.

Looking ahead to 2021, Iwry says, there are a few important points advisers might emphasize in their discussions with clients. First and foremost is the basic fact that taking an RMD does not always mean one has to liquidate their investments—a fact which is especially important to consider in a sudden and sustained bear market.  

“While one reason cited for the legislative 2020 RMD relief is to save retirees from having to sell when the market seems unusually low, an individual required to take a RMD from a traditional IRA often could actually avoid selling stock while the market is down by transferring the investments ‘in kind’ to a taxable account,” Iwry explains. “You will still have to come up with funds to pay the tax, but you ordinarily will have a way to avoid selling your equity investments at what may be the bottom of a market dip.”

This opportunity assumes the service provider or providers involved allow for such in-kind transfers. That’s not always going to be the case, Iwry says.  While this type of maneuver will often be possible for IRA owners (for example, with brokerage accounts), defined contribution (DC) plans usually make cash distributions.  Even in that case, though, Iwry notes that participants could often fairly quickly resume a similar equity investment position by reinvesting the cash distribution in similar stocks.    

“The public often doesn’t focus on this basic fact about RMDs,” Iwry says, “although more affluent people tend to be more aware that taking RMDs is about shifting to a taxable account, not necessarily about liquidating investments. That said, the 2020 RMD holiday of course is of limited value to the many retirees who need to or will in any event be spending at least as much in 2020 as the RMD amount.”