From job security to our normal daily routines, the COVID-19 pandemic has affected so many aspects of our lives, including the required minimum distribution (RMD). The CARES Act (Coronavirus Aid, Relief, and Economic Security Act) has impacted RMDs for 2020 by temporarily waiving them for all types of retirement plans. 

First, it’s important to understand what an RMD is and their usual associated regulations. From there, you’ll feel more equipped to see exactly how they’ve changed and what that means for you.
 

What Is a Required Minimum Distribution?

Per the Internal Revenue Service tax code, you can’t keep retirement funds in your account indefinitely. Traditional retirement plans, like a 401(k) or traditional IRA, allow you to defer paying federal taxes, but only for so long. Eventually, you have to start to withdraw funds from the account.
 
Your required minimum distribution (RMD) is the amount of money you must withdraw from your retirement account each year. Your RMD must be withdrawn by December 31st of each calendar year, either in installments or a lump sum. 
 
The age at which you must begin withdrawing funds from your account depends on when you were born:

• If you were age 70 ½ before January 1st, 2020, you were required to start taking RMDs for each year, beginning with the year you turned 70 ½. 
• If you were born after June 30, 1949 (you weren’t age 70 ½ before January 1st, 2020), you have to begin taking RMDs each year, starting with the year you reached age 72. 

Does the RMD Apply to My Retirement Plan?

The required minimum distribution applies to most retirement plans, including:

• Traditional IRAs
• Simple IRAs
• 401(k) Plans
• 403(b) Plans
• 457(b) Plans
• Profit-Sharing Plans
• Other Defined Contribution Plans

If you’re a Roth IRA owner, you’ll notice that Roth IRAs are not included on this list. This is because you have already paid income taxes on the money you deposited in your Roth IRA, so no minimum distribution is necessary. Withdrawals from your Roth IRA won’t help satisfy your RMD from the above-listed retirement plans, and if you inherited your Roth IRA, the RMD rules do apply to you.
 
Keep in mind, if you do miss the RMD deadline, the penalty can be severe. The IRS penalty is 50% of the amount you didn’t take on time. Although the deadline for taking RMDs is December 31st of each calendar year, you can delay taking your first RMD until April 1st of the year you turn age 72.
 
If you’re still working and any of the above plans are retirement accounts from your workplace (and you don’t own more than 5% of the business), you may be able to defer taking your RMD until April 1st, the year after you retire.

How Is the RMD Calculated?

Calculating the required minimum distribution must be done each year per the IRS tax code. The RMD amount equals your tax-deferred retirement account balance as of December 31st by your life expectancy factor.
 
The IRS Uniform Lifetime Table is the determinant of your life expectancy. If your spouse is ten years younger than you, your life expectancy factor is determined by the IRS Joint Life Expectancy Table. If you’d like to take a look, you can find both of these on the IRS website.

How Are RMDs Taxed?

Required minimum distributions are taxed as personal income, meaning that withdrawals count toward your total taxable income for a given tax year. They’re taxed at your applicable federal income tax rate, and they may be subject to local and state taxes. 
 
The RMD is essentially an increase in income for you. This increase can elevate you into a higher personal income tax bracket, which may impact your taxes needed to be paid for your Medicare or Social Security.

How Does the CARES Act Affect My RMD?

The CARES Act—designed to aid individuals financially because of the pandemic—temporarily waives required minimum distributions for all types of retirement plans, including IRAs, 403(b)s, 401(k)s, profit-sharing plans, and inherited IRA plans for 2020. This also includes the first RMD that you may have delayed from the calendar year 2019 until April 1st, 2020. The IRS will determine and announce accordingly if the RMD will be affected in 2021.

Finding Help

If you’re having trouble with your required minimum distributions or overall retirement plans, reach out to our financial services representatives. We can help guide you through changes to your RMDs and offer advice for retirement plans. 

We know it can be tough to figure out all the details of retirement, especially during a pandemic. Luckily, our Trust & Financial Services advisors here to answer any of your questions and are here to help you plan for the future ahead.