CARES Act Alters Required Minimum Distribution Rules
In response to the financial volatility caused by COVID-19, Congress recently passed the Coronavirus Aid, Relief, and Economic Security Act (CARES Act). In addition to providing stimulus and unemployment benefits, the law also suspends all Required Minimum Distributions (RMDs) from defined contribution plans otherwise required to be made in 2020. Normally, a retirement account owner of retirement age must withdraw a certain amount of money from their retirement account every year in order to avoid tax consequences. Under the CARES Act, account owners may skip both their 2019 RMD (if they had not made the 2019 RMD by April 1) and their 2020 RMD.
The RMD provision of the CARES Act aims to provide financial relief to retirees. The 2020 RMD would have been calculated based on the 2019 balance, which is likely much higher than an account’s current balance because of the market decline caused by COVID-19. Retirees would have to sell investments in order to have the cash for the RMD, but investment prices are at a historical low. Finally, retirees would have to pay taxes on the RMD, as that amount is considered taxable income.
While retirees still face volatile markets, the suspension of RMDs provides a small relief.