A key aspect of saving for retirement through qualified retirement plans and IRAs is deferring taxes until required minimum distributions (RMD) begin. Even with Roth IRAs, beneficiaries who inherit them must also follow RMD rules despite the tax-free treatment of the distributions. The failure to take RMDs can result in a 50% penalty. The SECURE Act (P.L. 116-94) and the CARES Act (P.L. 116-136) made dramatic changes in RMD rules for 2020 and beyond.

Changes for 2020

The CARES Act provides a waiver for RMDs from defined contribution plans (e.g., 401(k) plans) and IRAs for 2020. Those who would otherwise be required to take an RMD for 2020 need not do so. The waiver also applies to the 2019 RMD for an individual who has a required beginning date of April 1, 2020 (someone who attained age 70½ in 2019 but did not take the first RMD by Dec. 31, 2019, postponing it to April 1, 2020). Of course, distributions to those subject to RMDs can exceed required amounts at any time.

The waiver for 2020 does not change the required beginning date. For example, if an employee attained age 70½ before Jan. 1, 2020, and retires in the 2020 calendar year, that employee's required beginning date is April 1, 2021. The employee is not required to receive an RMD for 2020 before April 1, 2021, but must still receive the RMD for the 2021 calendar year by Dec. 31, 2021. Such individual may decide to take the first RMD in 2020 to avoid having to take two RMDs in 2021.

In the case of distributions in the form of an annuity that require spousal consent, there is an option of whether or not to have a new annuity starting date when the distributions restart. If the plan does not provide for a new annuity starting date, spousal consent usually is not required. If the plan provides that there is a new annuity starting date, spousal consent may be required for the suspension of distributions that include 2020 RMDs and the restart of distributions in 2021; it depends on the form of distribution in each case. The IRS has provided guidance for obtaining spousal consent electronically (Notice 2020-42).

Under prior law (the new law is explained later), beneficiaries had the option of postponing RMDs if they opted to use a five-year rule. Under this rule, the entire account had to be distributed no later than the end of the year following the year of the owner's death. For those using the five-year rule, the CARES Act effectively extends the period to six years; 2020 is simply disregarded.

The 2020 waiver does not apply to defined benefit (pension) plans. Such payouts must continue for 2020 and beyond.

Returning RMDs. Those who took RMDs earlier this year believing that they were required can return them to the plan. Usually, there is a 60-day rollover period, but the IRS has extended this to Aug. 31, 2020 (Notice 2020-51). In the case of an IRA, the return of an RMD is not counted as a rollover for purposes of the one-year rule; only one rollover is permitted per year, but the return of the RMD doesn't count.

Plan amendments. Defined contribution plans must adopt an amendment reflecting the CARES Act change. The appendix in Notice 2020-51 contains a sample plan amendment that can be used for this purpose.

Changes After 2020

The SECURE Act changed the required beginning date for RMDs for plan participants and IRA owners. For those who attain age 70½ after 2019, the required beginning date is age 72. (The age of 70½ was set in the 1960s and didn't take increased life expectancy into account.) Thus, the first RMD must begin by the end of the year of attaining age 72. The rule that allows the first distribution to be postponed until April 1 of the following year continues to apply. For example, an IRA owner born in March 1950 must take the first RMD in 2022, or postpone it until April 1, 2023.

The SECURE Act also changed the rules for inherited accounts, eliminating so-called stretch-IRAs in which beneficiaries could spread distributions over their lifetime. For those inheriting an account, including a Roth IRA, from an owner dying after Dec. 31, 2019, a 10-year rule governs RMDs. This rule requires the entire account to be distributed by the end of the 10th year following the year of death. The new 10-year rule applies regardless of whether the participant dies before, on, or after, the required beginning date, now age 72.

Exceptions to the 10-year rule. Some designated beneficiaries are not required to use the 10-year rule; they are called eligible designated beneficiaries:

• Spouse beneficiary. The surviving spouse can treat the IRS as his/her own account or choose to figure RMDs using the Single Life Expectancy table in IRS Publication 590-B.
• Minor child. The 10-year rule does not go into effect until the minor child reaches the age of majority under state law. Until then, RMDs to the minor child are figured under the Single Life Expectancy table. For example, a child age 10 inherits a parent's IRA. Distributions initially are taken based on the child's life expectancy figured using the table. At age 18 (the age of majority for the state in which the child lives), the balance of the account must be distributed under the 10-year rule.
• Disabled or chronically-ill individual. Such individual can choose between the 10-year rule or the Single Life Expectancy spread.
• Beneficiary not more than 10 years younger than the account owner. This individual, such as a sibling, can also choose between the 10-year rule or the Single Life Expectancy spread.

Unchanged. The SECURE Act did not alter the RMD rules for nonindividual beneficiaries. Thus, if an IRA is payable to the estate or to a trust, the old five-year rule continues to apply.

Final Thought

The changes for 2020 and beyond are complicated. They impact immediate and long-term tax planning. Expect to see more IRS guidance on many of the issues raised by the SECURE Act and the CARES Act with respect to RMDs.

Sidney Kess, CPA-attorney, is of counsel at Kostelanetz & Fink and senior consultant to Citrin Cooperman & Company.