The Coronavirus Aid, Relief, and Economic Security Act (CARES) was passed by Congress as a response to the economic fallout that has been triggered by the COVID-19 pandemic. A particular provision within CARES applies to beneficiaries of individual retirement accounts and some current account holders.
We will provide the details here, but first, we have to share some background information about these accounts.
Traditional Individual Retirement Accounts
When you have a traditional individual retirement account, you contribute into the account with earnings before you pay taxes. As a result, your taxable income is lower, and this is beneficial in the short term.
You cannot take money out of the account without being penalized until you are 59.5 years of age. Traditional individual retirement account holders are required to start taking required minimum distributions (RMDs) at some point, because the IRS wants to start getting its share before you pass away.
At the end of 2019, a different piece of legislation was passed that is called the Setting Every Community Up for Retirement Enhancement Act (SECURE). A part of this legislation change the age at which traditional IRA account holders must take RMDs. He was previously 70.5, but it is now 72.
There was also a provision in the SECURE Act that changed the law to give traditional account holders the ability to continue to contribute into their accounts as long as they are earning income. Prior to the passage of this measure, once you reached the age of 70.5, you could no longer divert money into your traditional IRA.
Beneficiaries of traditional individual retirement accounts have to take required minimum distributions each year, and the account must be cleaned out within 10 years. The time limit is another new wrinkle that was put in when the SECURE Act was passed.
Roth Individual Retirement Accounts
The other commonly used type of individual retirement account is the Roth IRA, and the major difference is the tax structure. Contributions into this type of account are made after taxes have been paid on the income, so withdrawals are not subject to regular income taxes.
This is also true for beneficiaries. Since the IRS was already paid, there is no mandate with regard to required minimum distributions for account holders. However, beneficiaries do have to take RMDs, and they are subject to the 10 year time frame.
The amount of the required minimum distributions is calculated based on the value of an account at the beginning of a given tax year. As we all know, the stock market took a nosedive when the impact of the novel coronavirus started to reverberate through the markets.
It would not be fair to force people to take RMDs based on the health of their accounts at the end of 2019. Under the terms of the CARES Act, there are no required minimum distributions in 2020. If you do not want to take money out of your account, you are not compelled to do so.
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You can reach our Albany, New York office at 518-389-6020. The number in Essex Junction, Vermont is 802-879-7133, and there is a contact form on this website that you can use to send a message to either location.