How Do 2020 Tax Law Changes Affect Your Retirement?

It’s no secret that 2020 has been a year to reckon with so far. It has also been a big year for tax law changes. In their efforts to help businesses and taxpayers cope with economic disruptions, Congress and the IRS have passed a veritable blizzard of new rules and deadline changes, many of them affecting retirement savings.

If you feel confused in the wake of these changes, wondering how they will impact your retirement savings and your strategies moving forward, don’t worry – you are not alone.

Since I run a self-directed IRA company and utilize self-directed retirement plans for myself and my family, I have made it a point to stay informed and up to date on how these changes not only impact our clients, but also myself, my children, and my grandchildren.

Although I cannot offer tax planning advice, per say, I would like to share what I’ve learned, in hopes that it may help you as well!

A Guide to 2020 Tax Law Changes

Required Minimum Distributions (RMDs)

For those who have an IRA or qualified plan, a required minimum distribution (RMD) is the amount the account holder would be required to take out once they have reached a certain age, and it is calculated based on their account balance.

The long and short of it is that required minimum distributions (RMDs) are suspended for 2020 for everyone, including all participants in IRAs and qualified plans (403(b)s and 458(b)s), due to the virus. If you recall, the government also did this back in 2009, during the financial crisis. The age has also been increased from 70.5 years old to 72.

So, what does this mean for you?

For starters, no one will be forced to take an RMD this year. It has basically been suspended for everyone. This also includes those who delayed taking first-time RMDs for the 2019 tax year, who didn’t receive the distribution before 1/1/2020.

After 2020, you will start taking the required distributions when you turn 72 years old. For those who were already taking them, the requirement will resume next year, and you do not have to take two to make up for the one waived.

If you took an RMD already for 2020, you were required to return it to the same account by August 31st. But if you didn’t return it, you can contribute it to a Roth IRA or a 401k. Starting this year, you are able to make both contributions and take distributions from the same account so long as you have earned income (contribution limits still apply).

Early Distributions

There have also been many changes regarding early distributions, including those for births/adoptions, medical expenses, or disasters.

For births or adoptions, there is now no withdrawal penalty for early distributions within 1 year of the event, which means that some 2019 births and adoptions are eligible. The maximum withdrawal is $5,000 per taxpayer per birth/adoption. Of course, you are going to be spending much more than that when you have a child. But repayment is also permitted, with no deadline.

For medical expenses, there had been what’s called an adjusted gross income (AGI) exception available but the expenses were required to amount to 10% of your income. It has been lowered to 7.5%, which means that you would have to spend less to qualify. It covers all years prior to 2021, so there may be savings available to you if you amend returns for previous years.

Finally, the maximum early distribution allowed for a disaster has been increased from $50,000 to $100,000, and it is available to those who suffered qualified disasters between January 1, 2019 and March 19, 2020.

Beneficiary Distribution Schedule

Additional changes have been made for the distributions taken from beneficiary accounts. Specifically, the distribution schedule has been accelerated for beneficiaries of IRA account owners who pass after December 31, 2019.

The beneficiary must withdraw all funds within 10 years of the account holder’s death (not including year 2020).

That said, there are a few exceptions. If no RMDs were taken by the account holder prior to their death, the surviving spouse can wait until turning 72 before taking distributions.

Also, minor children may be able to wait until they reach majority before taking distributions. This depends on your state, so be sure to check requirements and consult with your tax professional or financial advisor.

Beneficiaries who are less than 10 years younger than the deceased are excluded from the new, accelerated timeline, the disabled or chronically ill are also excluded.

Non-spousal beneficiaries, such as charities or estates, must withdraw the funds within 5 years. For example, if a non-spouse beneficiary (who is not an eligible designated beneficiary) was required to begin death distributions in 2020 over a 5-year period, the year 2020 would be waived and the distribution period would end in 2025.

Contributions

You can now contribute, or continue contributing, to IRAs, 401ks, and qualified plans at any age, as long as you have earned income for that tax year.

This means that you can take RMDs from and make contributions to an IRA/401k in the same year. So, if you are expected to begin or resume taking distributions after 2020, but you wish to keep that money working for you in a qualified plan, you can still contribute the same amount.

Please note that the above is not an end-all-be-all list of tax law changes. If you wish to access more of your retirement savings, due to financial constraints, rather than to keep the money in your account, there are other changes impacting loans or withdrawals from your IRA.

To learn more about this year’s tax law changes, check out the IRS website at https://www.irs.gov/coronavirus, and make sure to consult with your tax professional.