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2020 Required Minimum Distribution: To Waive or Not To Waive

By FRANK G. SWEENEY, CPA

December 9, 2020

The 2020 Presidential election has come and gone.  We will likely have a new president.   The coronavirus is still with us and is threatening to shut down significant parts of the country.  Politicians and interest groups are calling for more relief for affected businesses and individuals.  Earlier this year, the Coronavirus Aid, Relief, and Economic Security (CARES) Act provided taxpayers with the ability to waive one’s required minimum distribution (RMD) from defined-contribution retirement accounts for 2020.  This would serve to keep individuals and the economy from their money.  Of course, that would be by their own choice.

Those that had taken a distribution before the law was passed or had taken a distribution without knowledge of the law had until August 31, 2020, to rollover or redeposit the funds distributed to take advantage of the waiver relief.  Distributions could also be reversed if done so within 60 days of the distribution.  On the surface, it sounds like a good idea not to take a distribution if one doesn’t need the money and is not required to, especially if other category income increased over the prior year.

But is that the most prudent decision?  It most likely is for many but maybe not for all.  Let’s take a look at a few reasons why. First, this provision was included in the CARES Act in the first place because the financial markets were deeply depressed at the outset of the pandemic.  Congress did not want to have people, specifically senior citizens, suffer permanent investment losses due to the crash in the markets.   As of this writing, the markets have recovered virtually all of their losses and some are even up slightly for the year.  A case could be made that one should take retirement distributions anyway and cash in profits while values are high.  With COVID-19 threatening our lives and our economy, the financial markets are as likely to be in decline as they are to continue to recover.   One need not take the entire otherwise required distribution as there is no need in 2020.   He or she could take a partial distribution or even use this as an opportunity to convert pre-tax funds to Roth accounts instead of taking the RMD since the tax for doing both could be avoided.

Another reason for opting out of the waiver of a distribution is the tax rates themselves.  Without taking RMDs, many could be in lower tax brackets this year and possibly miss an opportunity to use up those lower brackets.  Not taking distributions this year could also increase distributable value in future years and push some distributions into higher brackets. Not taking the distribution in 2020 could result in an erosion of value if there is a decrease in the markets.  Also, there is the thought that tax rates could be raised at some point.  Even before the pandemic hit us, the United States budget deficit was at unprecedented levels.  Now, the cost of the bailout of the country for this global disaster must be tacked on.  One would expect that taxes will need to be increased at some point, though it is hard to say when.

Tax proposals being considered included raising corporate tax rates, and rates for individuals making over $400,000.  However, it is not clear if Congress will be able to enact significant tax law change if the Republican Party still controls the U.S. Senate.  Nonetheless, tax rates seem to be better now than they might be in a year or two.  Insomuch as many individuals have withholdings from these distributions to pay for the tax on this and maybe even other income as well, and/or have paid estimated tax assuming that they will receive distributions and then don’t, the decision to waive or not to waive is hardly one that should be made without a second thought.

A third consideration is the tax and financial status of the residual beneficiaries of said funds.  Are they in even higher tax brackets than the owner(s) of the account?  Are they financially secure to the point of not needing the funds? In summary, there may be many good reasons for not taking retirement distributions.  However, there may be just as many reasons to take some or all of a required distribution one would otherwise be required to take.

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If you have any questions regarding this matter or need assistance with another tax-related issue, Klatzkin can help.  For additional information, click here to contact us. We look forward to speaking with you soon.

Angela Lawrence, Quality Control Coordinator at Klatzkin, contributed to this post.

©2020 Klatzkin & Company LLP. The above represents our best understanding and interpretation of the material covered as of this post’s date and should not be construed as accounting, tax, or financial advice. Please consult your tax advisor concerning your specific situation.

About the Author

Frank is a Partner and focuses on providing tax planning, compliance, and optimization for businesses in real estate, manufacturing, technology, and professional services. His passion for his clients business and depth of knowledge allow him to work with his clients to help them plan and find tax savings. His deep understanding of taxes made it...

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