CARES Act Impact On 2020 IRA Regulations

The CARES Act of 2020 has several provisions relating to owners of Traditional IRA and Roth IRA accounts. The extension of contribution deadlines and the suspension of required minimum distributions (RMDs) are two major changes affecting retirement accounts this year. In addition, the IRS recently published updated guidelines for IRA owners who took their required minimum distributions early in 2020.

2019 IRA Contributions Deadline Extended

Due to the impact of the COVID-19 pandemic, the last day for filing 2019 tax returns was extended from April 15 to July 15 as part of the CARES Act legislation. As such, the deadline for making contributions to your IRA account for the 2019 tax year has also been extended to July 15. Contribution limits have not been altered by the recent legislation, remaining at $6,000 for individuals under age 50 ($7,000 for those 50 or older) so long as taxable income is at least equal to the amount contributed.

The extension also applies to 2019 Health Savings Account (HSA) and Coverdell Education Savings Account (ESA) contributions.

2020 Required Minimum Distributions Suspended

Due to provisions in the CARES Act, minimum distributions that would have been required in 2020 have been suspended. This means that if you are over the age of 72, or already subject to RMD requirements (turned age 70 ½ before 2020), no distribution is required from your IRA this year.

This may come as a relief to many IRA account holders as required distributions are based on the ending value of the IRA account on December 31 of the previous year. As it stands today, those values for 2019 are likely materially higher than the market value of accounts today due to the COVID-19 crisis. Thus, without the suspension of required distributions, IRA owners would have been forced to take relatively larger distributions from accounts after market values have declined significantly. With the requirement removed, distributions for 2020 can be based on a client’s cash needs rather than satisfying IRS requirements.

What If 2020 Required Minimum Distributions Have Already Been Taken?

Until the IRS issued updated guidance, the CARES Act legislation did not include any specific provisions for rolling distributions back into IRA accounts if taken before the passage of the legislation. The IRS has now provided further guidance on this issue.

Typically, RMDs taken are not eligible to be rolled over into another plan, or back into the distributing account. Any distributions already taken in 2020, however, are treated as voluntary distributions, rather than as RMDs, making them eligible for rollover treatment. Generally, IRA rollovers must be made within 60 days of distribution, and IRAs are generally subject to a limit of one rollover every 12 months. Earlier this year, the IRS extended the 60-day rollover requirement to July 15 for a 2020 RMD taken as early as February 1. Distributions taken in January 2020, however, were not eligible for non-taxable rollover treatment for those distributions.

In June, the IRS issued further guidance, extending the 60-day rollover requirement for 2020 RMDs to August 31, including RMDs taken in January 2020. In addition, the “one rollover every 12 months” limitation is waived for rollovers related to 2020 RMDs. Consequently, an IRA owner who received an RMD in 2020 will have until August 31 to return up to the amount of the distribution to the IRA for treatment as a non-taxable rollover.

If you have any questions regarding these changes or other items relating to your investment accounts, please contact your Scharf Investments relationship manager at 831.429.6513.