Abstract: If you’re like many people, you’ve
worked hard to accumulate a nest egg in your traditional IRA. Knowing the finer
points of the distribution rules is critical — particularly as some of these rules have temporarily
changed under the Coronavirus Aid, Relief and Economic Security (CARES) Act.
This article covers the latest details.
Taking distributions from your traditional IRA
Like many people, you may have worked hard to accumulate a nest egg in your traditional IRA. Knowing the finer points of the distribution rules is critical — particularly as some of these rules have temporarily changed under the Coronavirus Aid, Relief and Economic Security (CARES) Act.
Early
distributions
The COVID-19 pandemic has caused many people
to take or consider taking early IRA distributions. The CARES Act allows you to
withdraw up to $100,000 on or after January 1, 2020, and before December 31,
2020, on a tax-advantaged basis if you meet one of various conditions related
to the COVID-19 crisis —
even if you’re under age 59½.
If you qualify, the CARES Act waives the 10%
early withdrawal penalty and allows you to spread the tax liability over three
years. You can avoid tax by recontributing the withdrawn amount within three
years (regardless of annual contribution limits in those years). We can
help you determine whether you qualify.
Required
minimum distributions
People with traditional IRAs
generally must begin taking annual required minimum distributions (RMDs) by April 1 of the year following the year in
which they reach age 72 (70½ if you turned 70½ before January 1, 2020). RMDs
are also generally required for inherited retirement accounts regardless of the
heir’s age (unless the heir is the original owner’s spouse).
The CARES Act allows you to skip a 2020 RMD.
Doing so can allow funds to continue growing on a tax-advantaged basis. Plus,
if the values of investments in your account have declined because of the
economic downturn, taking a distribution means selling shares at a much lower
price.
Remember, your RMD for 2020 is calculated
based on the account’s value as of December 31, 2019. If that value has
declined, the RMD will represent a larger percentage of the account’s total
value than you originally anticipated. Skipping your 2020 RMD can enable you to
maintain the account’s value as much as possible for another year in the hope
that investment values will improve in the future.
Keep more
money
Prudently planning how to take money out of your traditional IRA can mean more money for you and your heirs. Contact us to review your account as well as to discuss any aspect of retirement planning. Finally, be aware that the CARES Act relief discussed here can also apply to many employer-sponsored retirement plans, such as 401(k)s.
© 2020