Most Americans are aware that IRS suspended Required Minimum Distributions (RMDs) from Tax-Deferred Retirement Accounts, including IRAs, 401(k)s, etc. for calendar year 2020. This followed an earlier change permanently raising RMD age requirements from 70-1/2 (a number no one could explain) to 72. Another lesser-known benefit was the passage of new 2021 RMD Withdrawal Tables, which extend useful lives of Retirement Accounts to match our increasing life expectancies. New RMD Tables take effect just as RMD requirements are scheduled to resume in 2021.
Because these Congressional actions were passed in response to COVID-19 and were not announced until well into 2020, rules got changed after many 2020 RMDs had already been taken. Affected account owners include some who would prefer not to incur unnecessary taxable income from RMDs. This minority of “Seasoned Citizens” were trapped with little or no way to take advantage of the 2020 RMD waiver. Van Wie Financial recognized that this was unfair to those taxpayers, and surmised that Congress and IRS would most likely issue subsequent rulings to equalize the impact.
Initial IRS rulings were released as Notice 2020-50, which allowed some, but not all, RMD replacements. While better than the original law, many people who withdrew early in the year were still left out, unable to receive equal treatment under the law. IRS eventually recognized the problem (we are sure they were “reminded” several times by citizens and taxpayer advocates).
On June 23, 2020, IRS released Notice 2020-51, which opened up the RMD replacement process to all who care to participate. In the newest Notice, IRS extended and expanded relief until August 31, 2020, for all RMD replacements. We commend this IRS action, which lifted all prior restrictions on which 2020 RMDs were eligible to be replaced.
Not taking an RMD reduces Taxable Income, thereby reducing the taxpayer’s 2020 actual Income Tax. Some taxpayers will be fortunate enough to have their marginal tax brackets reduced, saving even more in current taxes, and/or reducing next year’s Medicare costs. But that’s not all; leaving more money in tax-deferred accounts allows for further tax-deferred asset value growth. In a year when markets are struggling, these changes present solid benefits to some owners of Qualified Retirement Accounts.
Relatively few Americans are actually affected by the 2020 rulings, but it is extremely helpful to those who are. As financial planners, we are pleased that both Congress and the IRS did the right thing this time, and we salute them.
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