Withdrawing IRA Funds Before Year End – Part 2

This year has been unlike any other.  The pandemic has resulted in hundreds of thousands of deaths and many Americans continue to face economic hardships caused by the government imposed shutdowns and restrictions.  At the same time Congress did pass a relief package back in March called the CARES Act.  As I said last week, this act provided some changes to the rules governing retirement accounts for 2020.  As we approach the end of the year let’s review them.

Congress suspended the required minimum distribution rules for 2020.  That means Americans over 70 and 1/2 years of age do not need to meet their RMD amount for this year.  If you already took your RMD for the year before the law was passed you could put it back without having to pay tax on it (but you had to do this by 8/31/20).

Additionally, for certain qualified individuals who are younger than 59 and 1/2, the 10% early withdrawal penalty was suspended for 2020 if they withdraw funds from their retirement accounts.  You are a qualified individual if you or your spouse was diagnosed with COVID-19 or you experienced economic hardship as a result of the viruses (as defined in Section 2022 of the Act).

But let’s go back to the part about waiving the RMD requirements.  Even though you are not required to take your RMD does it still make sense to take it anyway?  I would submit that in some cases it just might.

Many clients come to us to do what we call crisis planning in order to qualify for Medicaid.  For example they may need nursing home level care immediately and have a large percentage of assets in retirement accounts.  They will need to withdraw a significant part or possibly all of those assets to restructure and/or spend them down before reaching Medicaid eligibility. 

When we see clients who do not yet need that level of care but will likely get there within a few years, we often advise them to consider withdrawing more of these accounts than required under RMD rules each year to spread out the withdrawals and thus lower the tax liability that would be owed compared to taking the funds in one lump sum in one tax year.

In that case, for those individuals, withdrawing funds from their IRAs in 2020, even though RMD rules have been suspended, just may make sense.