Forever standing on the side of our clients..especially now. See resources we have developed to help through this COVID-19 crisis. Learn More

CARES Act unpacked – what’s the scoop on RMDs for retirees?

The CARES Act waived the Required Minimum Distributions in 2020. Jeffrey Levine explains the provision, what retirees can expect, and how withholding RMDs can impact your overall financial plans.

Transcript

Tim Maurer:
Hello Tim Maurer back with another episode of Ask Buckingham. A video podcast designed to bring clarity and calm in the midst of confusion and chaos by connecting your great personal finance questions with straightforward answers from industry thought leaders. Today we’re doing another segment with Buckingham’s, director of advanced planning, Jeff Levine, who has been very busy chasing down the details of the CARES Act and how it may and may not benefit you. Jeff let’s start by talking about what the CARES Act is in general. Just remind us and then let’s talk specifically about the impact on retirees. People who are not employed today, thankfully, but are relying on their investment assets and fixed income in order to provide a source of income.

Jeffrey Levine:
Sure. So the CARES Act is the Coronavirus Aid Relief and Economic Security Act, and that is the third in a series of stimulus bills designed to help the United States and our citizens deal with the COVID-19/ coronavirus crisis. It is a roughly $2.2 Trillion spending bill. When you add in loan provisions, et cetera, closer to $6 trillion. Really by far the largest bill that we’ve seen from a spending perspective come through. And it was done in about 10 days, which is really the amazing part.

Tim Maurer:
Wow. 880 pages in 10 days seems almost impossible even for Congress. Well, what is the impact of the CARES Act on people who are retired?

Jeffrey Levine:
I think the single biggest provision that’s going to impact those persons are the suspension of required minimum distributions. Especially for those who have been really good savers over the years. Maybe now is not the time where they want to take distributions from their retirement account because account balances have dropped substantially, et cetera. They may wish to have those dollars remain in their account and they can do so this year, thanks to that suspension of required minimum distributions.

Tim Maurer:
So will they ever have to make that requirement of distribution again in the future or this year, you just don’t have to take it if you don’t want to?

Jeffrey Levine:
So not only this year, don’t you have to take it. So the 2020 requirement of distribution is waived. In addition, there was a surprising special feature of the rule which said if you turn 70 and a half last year in 2019 and you delayed your required minimum distribution into 2020, so normally most people in the first year that they turn 70 and a half, they take their distribution that year. They take their second RMD in their next year. But you can in your first year only wait until April 1st of the year after you turn 70 and a half under the old rules, 72 under the new rules of the SECURE Act.

Jeffrey Levine:
Well, the IRS or Congress, I should say really surprised everybody and said, not only can you avoid taking your 2020 RMD, but if you turn 70 and a half in 2019 you can also avoid taking the 2019 RMD that you delayed into 2020. So for those of you out there listening to this who worked procrastinators and didn’t do what you probably should have done, congratulations. You’re way smarter than everybody else.

Tim Maurer:
Yeah, Right. Always good to reward some procrastination, right?

Jeffrey Levine:
Yes it did. And it’s really one of the oddities of this bill, but it is part of the law nonetheless. So those individuals actually get to bounce or waive two different RMDs compared to everyone else who will see one such distribution waive for this year. Then of course next year in 2021 start again.

Tim Maurer:
And that will be based on your account balance as of 12.31.2020 is that how your 2021 will be handled?

Jeffrey Levine:
That’s correct. We will essentially pretend next year as if you took it this year, life will go back to normal. It will be as if nothing was unique about this year. For this year though, while we’re in it, it’s a little bit unique.

Tim Maurer:
Okay. So is there anything that a retiree needs to do to take a reduced RMD or take no RMD at all for 2020 in this year? Is there any form that they have to fill out or can they just bypass this entirely?

Jeffrey Levine:
Well that’s a great question and it really depends on what that retiree has already done. So for some people, they will call their custodian, right? And they will say, please send me my RMD this year of $20,000. Other individuals have these set up on automatic distributions where they say every year send me X amount of dollars. Or they take proactively, $4,000 a month knowing it will cover their RMD. If that’s the case, you need to proactively stop those distributions. In addition, in some cases, some people may have actually taken their distribution earlier in 2020 thinking they had an RMD and now only after the CARES Act is past, realize that that amount is not really an RMD.

Tim Maurer:
So do they have to pay something back? Do they have to fill out any form to clarify that it wasn’t actually an RMD?

Jeffrey Levine:
So have to, the answer’s no, but they may want to, right? If they don’t need that income and they’re trying to keep their income as low as possible this year, they may want to try and put that back into a retirement account. Now, that is certainly possible. The easiest way for that to occur would be if we catch the distribution within 60 days and it can go back into another eligible retirement account. So let’s say this came from an IRA, if you’re within the 60 day window and you haven’t done another of these 60 day rollovers within the past year, then you can just move that money back into an IRA and avoid the tax consequences. If on the other hand, you have taken another distribution over the past year from an IRA and rolled it over, then you may not be able to do that because of the once-for-your-rollover rule.

Jeffrey Levine:
Instead, maybe you end up moving it to a Roth IRA because it’s an exemption to the once-for-your-rollover rule. Still be taxable, but at least it’s growing tax free, which by the way brings up one other item which is that those retirees who don’t have a required minimum distribution this year and who may have other income like investment income depressed this year compared to other years, this may be a particularly attractive year for them to look at things like a Roth conversion while assets are down, while income is down, this may be an opportune time for retiree and perhaps the last time in their life that they won’t have to take a required minimum distribution to make a conversion.

Tim Maurer:
Right. Talk about that a little bit more. What benefits could be derived from a Roth conversion in general and then maybe specifically in 2020?

Jeffrey Levine:
Sure, so a Roth conversion takes money that was previously in some sort of tax deferred account, like a traditional IRA, a 401k, a 403b and it moves it into an account where going forward it will grow tax free, provided you meet certain rules. And the cost of doing that is that in the year you make the conversion, you have to include the income that’s converted as part of your overall taxable income. I like to think of it as going to work for Roth for the year, right? So if you do $100,000 conversion, means Roth paid you $100,000 and you’ve got to pay tax on that. Now, notably, people have been brainwashed probably from the time that they were very young. “Don’t pay taxes before you have to.” Like, “Kick that can down the road. Why would you do that when you can avoid paying taxes today?”

Jeffrey Levine:
And while that may be the right answer for some people, the better answer for others is always try to pay taxes when your rate is the lowest, right? That is really the heart of good tax planning, is pay taxes when your rate is the lowest. Which may be later on, but it may be today because we don’t know what the future holds. What if Congress realizes that, “My goodness, we just spent $2 trillion, we need to pay for it somehow. Let’s raise taxes.” Or what if you’re a married couple, you file a joint return and all of a sudden one spouse dies and you go from using the big cushy joint brackets down to the single filer brackets. Your tax rate could be increased there even though you might actually have less income as a surviving spouse. So there’s all sorts of reasons that you could actually see a tax rate increase without your income or your deductions changing that much.

Jeffrey Levine:
Now having said that, why this year is particularly attractive is, if we’re looking at paying tax at the lowest rates, having lower income certainly helps. And you may have lower income this year as a retiree because A, your normal required minimum distribution that’s included every year, doesn’t have to be there and you can’t convert a required minimum distribution. You can convert above and beyond it, but that means normally a 75 year old, for instance, has to first take their RMD and then above and beyond that on top of that income can add more. Well, this year we can subtract that RMD out. That helps. Investment income might be down this year. Interest rates are back down at essentially historical lows. So the interest that may have been received on money market funds or savings accounts, et cetera, maybe a fraction of what it was fractionally even before. Right? A fraction of the previous fraction.

Tim Maurer:
Fraction of a fraction.

Jeffrey Levine:
Exactly. One eighth of a 10th of a quarter of a 12th of a percent. So that income may be lower. We may see companies cut dividends. So there’s lots of reasons that a retiree may see their income lower this year. And if that’s the case, it may be an opportune time. And to add on to that, we’re also potentially converting at depressed asset levels, which means that hopefully we can ride the conversion amount and the equities, the recovery that wave back inside the Roth IRA where it can be tax free for the rest of your life, for the rest of your spouse’s life, for the rest of your beneficiaries lives.

Tim Maurer:
Okay. So we’re talking about the elimination of the RMD requirement in 2020 and perhaps even some element for those who turn 70 and a half in 2019. We’re talking about tax planning opportunities for people who might just see lower tax rates at this point in time, an opportune time to make Roth conversions. Is there anything else about the CARES Act that you see as being a specific opportunity for retirees?

Jeffrey Levine:
Well, there’s a lot in there that will have some kind of ancillary benefits. Not as meaningful as perhaps this for savers who’ve accumulated large balances, but certainly many retirees will qualify for the recovery rebate checks, which are the $1,200 per adult person. Now, if your income exceeds certain levels, so if you’re a married couple and your AGI was higher than $150,000 or you’re a single individual and your AGI was higher than $75,000, then those checks may be phased out. But a lot of retirees have income below those ranges. And so they may see some checks there. And then in addition there’s some also some Medicare benefits as well. So the CARES Act makes perfectly clear that when a vaccine is available, if, and when we see a COVID-19 vaccine, the Medicare will cover the cost of that without any cost sharing. So no deductibles, no copays, et cetera.

Jeffrey Levine:
In addition, during this time, we’re talking about who are the most high risk population. It’s typically, it’s going to be people with preexisting conditions as well as those individuals who are a little bit older. And obviously if we’re talking about people retired and not taking requirement of distributions, they kind of fall into that higher risk category. And one of the ways you can mitigate the risk is by not going out to the extent possible.

Jeffrey Levine:
So along those lines, the CARES Act authorizes a Medicare part D participant. So those who have a drug plan to ask and request up to a 90 day supply of medication from their plan instead of the typical perhaps 30 day supply that they might get, et cetera. So it may mean fewer trips out to the pharmacy or just simplify their lives in a time when perhaps they’ve got bigger things to think about and bigger fish to fry, so to speak.

Tim Maurer:
Yeah, and Jeff, you’re not just a CARES Act guy. You’re not just a tax guy, you’re a comprehensive financial planner. Any other guidance you would offer retirees who are looking at lower levels in their retirement accounts this year, looking at the health impact of COVID-19, anything else you can think about that you would offer these folks?

Jeffrey Levine:
No, how much time have you got Tim? I mean, I would look at this and say, many people also have savings elsewhere. This may be a time to do some obvious things, if you will. Like tax loss harvesting. Despite the fact that we’ve seen decreases in asset values, people may still have a lot of gain from the previous decade bull run of the market there. If you see a significant drop in income this year, perhaps you look at selling some of those assets, particularly if you’re in the 10% or 12% ordinary income tax bracket because that actually means you’re in a 0% capital gains bracket. And paying tax at 0% is way better.

Tim Maurer:
Big a deal.

Jeffrey Levine:
Yeah, it’s actually even better than not paying tax. And some people are probably like, “What? How is that?” Because when you pay tax at a 0% rate, you create [bastes], you’ve got new money that will never be taxed again.

Jeffrey Levine:
So, there’s lots of things I would encourage individuals to make sure they’re reaching out to their financial advisors, to their tax professionals and frankly even their attorneys during this time. One of the things that we’re learning is that a lot of individuals are having to go on ventilators if they go into a hospital, right? And a ventilator is a means of artificial life support. Some people may have in their healthcare directives, “Please do not use any means of artificial life support.” Maybe we want to change that, right? Maybe we want to say, “Please don’t use any means of artificial life support if it’s clear that I have no chance of recovery, right?” There’s a big difference there between, “Something happened and I have no chance of recovering. I don’t want to be kept alive by artificial means indefinitely.” Versus, “Hey, if I go onto this machine, there’s a decent chance that I might be able to recover.”

Jeffrey Levine:
So even looking at our advanced directives, who’s going to be making those decisions? Maybe that’s changed today. You might want someone closer to you than in the past because travel may be more difficult. So there are so many elements of what’s going on right now. There’s, really an unlimited amount of conversations that we could have, which is why I asked, how much time you got, if you want to spend the next three hours talking about this. I’d love to, but I know we’re on limited amount of time today and it’s why I think it’s so important for everyone listening to reach out to their trusted professionals to make sure that they get the guidance that is unique and specified and tailored just to their own personal situation.

Tim Maurer:
Jeff, thank you so much for that sound advice, and thank you tuning into this episode of Ask Buckingham. If you have a specific question about the CARES Act, about retirement, but anything within the realm of personal finance that you’d like to see us addressed, you can do so by navigating the website, askbuckingham.com or emailing your question to question@askbuckingham.com or make it easy on yourself. Just click in the upper corner of the screen. It’ll take you directly to the website. There are no dumb questions, but unfortunately there are plenty of poor answers out there. Our hope is that in giving you straight answers to your questions, you’ll be able to apply that knowledge in pursuit of good sound decision making. So please follow us. And by all means, ask Buckingham.

Ask us a question for a video.

Our hope is that in giving you straight answers to some questions weighing on your mind, you’ll be able to apply that knowledge in pursuit of good decision-making. If there is a topic you’d like us to address in a future video, share your idea with us!

Featured Guests

cheri dorsey
Cheri Dorsey
Co-Founder & Owner of Sessa & Dorsey, LLC

Cheri is the co-founder and owner of Sessa & Dorsey, LLC, an estates and trusts boutique law firm practice.

Mike Kenneally
Vice President & Co-Founder at ECD Lacrosse

Mike Kenneally is vice-president and co-founder of East Coast Dyes Lacrosse, a small lacrosse equipment manufacturing company in Maryland.

michael_oneal
Michael O'Neal
Executive Director at OneWorld Health

Michael is the executive director of the global nonprofit One World Health, which partners with communities in developing countries to bring permanent, sustainable healthcare to the chronically underserved.

Moira Somers
Dr. Moira Somers, Ph.D, C.Psych
Neuropsychologist, Professor and Executive Coach

A neuropsychologist, Moira specializes in the growing new field of financial psychology.

Meir Statman
Meir Statman, PhD
Research Advisor

Meir Statman is the Glenn Klimek Professor of Finance at the Leavey School of Business, Santa Clara University. His research focuses on how investors and money managers make financial decisions and how these decisions are reflected in financial markets.

Featured Associates

Tom Bodin
Tom Bodin
Practice Integration Officer

As a Practice Integration Officer at Buckingham, Tom Bodin provides fractional CFO services to align wealth creation strategies for owners of legal, dental, and medical offices including tax, pension and retirement planning.

Aaron Grey
Aaron Grey
Director of Planning Integration

As the director of planning integration at Buckingham, Aaron helps advisors develop, implement, monitor and update wealth management strategies in pursuit of their clients’ financial goals.

Kevin Grogan
Kevin Grogan
Managing Director, Investment Strategy

Guided by academic research, Kevin Grogan, Director of Investment Strategy, oversees our overall strategy and helps clients and advisors alike distill complex investing topics. 

Jared Hoffman
Jared Hoffman
Managing Director, Relationship Management

As Managing Director at Buckingham, Jared provides education on best practices around cybersecurity. He is a member of Infraguard, a partnership between the FBI and public sector created to share information on cybercrime.

blerina_hysi
Blerina Hysi
Fixed Income Trading Manager

As fixed income trading manager, Blerina helps construct and maintain customized bond portfolios, all with an eye toward finding the best way to implement the client’s comprehensive financial plan.

Jared Kizer, CFA
Chief Investment Officer

As Chief Investment Officer and chair of the firm’s Investment Policy Committee, Jared evaluates findings from academic research and applies that learning to architect the firm’s investment strategy.

Jeffrey Levine
Jeffrey Levine
Director of Advanced Planning

As Director of Advanced Planning, Jeffrey serves as a technical resource for advisors and the firm’s primary thought leader regarding evidence-based planning concepts and strategies.

Irv Rothenberg
Irv Rothenberg
Wealth Advisor (Retired)

A Buckingham wealth advisor (retired) with more than 40 years’ experience, Irv’s passion is helping advisors and their clients create meaningful conversations around important end of life issues.

Jonathan Scheid
Jonathan Scheid, CFA, AIF
Managing Director, Solutions

With over 20 years of experience working with advisors and their clients, Jonathan enjoys sharing interesting perspectives on a wide range of investment and economic topics.

Brant Steck, CFP®
Brant Steck, CFP®
Risk Management Consultant, First Element Insurance Partners

Brant is a Risk Management Consultant at First Element Insurance Partners.

Susan Strasbaugh
Susan Strasbaugh
Wealth Advisor

As part of a firm of fiduciary, fee-only wealth advisors, Susan takes a total-care approach to identifying, organizing, planning, implementing and coordinating clients’ most important financial goals.

Larry Swedroe
Larry Swedroe
Chief Research Officer

As Chief Research Officer, Larry Swedroe has authored or co-authored 16 financial books and devotes all of his time to research and education in the areas of investing, financial planning and behavioral finance.