Inherited IRAs and RMDs in the time of the CARES Act
Question of the week: What are the options for inherited IRAs and RMDs under the CARES Act?
Q. Can inherited IRA beneficiaries waive RMDs for 2020?
Two brothers, Jose and Luis, each inherited one-half of their late uncle’s IRA. Their uncle passed away in June of 2019 and he was in his 60s. The executor of his estate established separate inherited IRA accounts for each brother, and each was given an option of taking either life expectancy distributions or taking the whole IRA balance within five years. Jose and Luis are both in their 30s.
Before the CARES Act passed, Jose took his first required minimum distribution from his inherited IRA in March 2020, based on his life expectancy. Luis wasn’t, and still isn’t quite sure what he wants to do so has not taken a distribution or made any decisions yet.
Are the beneficiaries required to take distributions in 2020? If not, can Jose return his distribution to the IRA? What rules will Jose and Luis be subject to in 2021?
A. Yes, under the CARES Act IRA beneficiaries don’t have to take 2020 distributions and can repay 2020 distributions by August 31, 2020.
The CARES Act waives required minimum distributions (RMDs) during 2020 for IRAs and retirement plans, including mandatory distributions for beneficiaries of inherited accounts. Thus, Jose and Luis are not required to take any distributions this year.
The CARES Act also allows Jose to return the distribution to his inherited IRA. He must repay the distribution by August 31, 2020 to avoid paying taxes on the distributed amount. The decision to repay the distribution is optional; Jose can keep the distribution if he wants to.
Jose’s and Luis’s uncle passed away before 2020, so as beneficiaries they are subject to pre-SECURE Act rules for inherited IRAs. Even though RMDs are suspended for 2020, the same rules will apply in 2021. Under these rules, if an IRA owner dies before reaching his required beginning date, which is the case with their uncle, beneficiaries figure their RMDs using the single life expectancy table (Table 1).
Since the account was split into separate inherited IRAs, each brother will use his own age to determine his required distribution in 2021. Note that had the account not been split, the distribution would have to be figured based on the older brother’s age (i.e. based on the one with the shorter life expectancy) and then allocated to each brother.
Another provision of the CARES Act allows beneficiaries to disregard 2020 for purposes of the five-year rule. This means that Luis now has until the end of 2021, rather than 2020, to decide what he wants to do with the inherited IRA. If he makes the decision to go with the five-year rule instead of taking life expectancy distributions, he would have to distribute the entire inherited IRA balance by December 31, 2025.