On March 27, 2020, President Trump signed into law the Coronavirus Aid, Relief, and Economic Security (CARES) Act. While the CARES Act provides a number of benefits for those individuals affected by the coronavirus, one is the suspension of required minimum distributions (RMDs) for defined contribution plans including the Thrift Savings Plan (TSP) and traditional IRAs during calendar year 2020.
This column discusses how the waiver of RMDs during calendar year 2020 affects federal employees and annuitants.
RMD rules in general and how they work
RMD rules limit the time qualified retirement plan and traditional IRA assets can grow tax-deferred by forcing qualified retirement plan (these plans include 401(k) plans, 403(b) plans and the TSP) participants and traditional IRA owners to begin annual distributions from these plans and traditional IRAs no later than their required beginning date (RBD). Note that the RMD rules do not apply to Roth IRAs until the Roth IRA owner dies.
The following chart summarizes the RMD rules for traditional IRAs and the TSP:
Required Minimum Distribution (RMD) Comparison Chart
(Traditional IRA versus Thrift Savings Plan)
Uniform Lifetime Table
(Table III of Appendix B in IRS Publication 590-B)
Two examples – one for a traditional IRA and one for the TSP – will illustrate the RMD rules. The examples are presented for calendar year 2019. Another two examples are presented for calendar year 2020 in order to understand the significance of the suspension of the RMD for calendar year 2020.
Example 1. James, a federal employee, was age 72 in 2019. James has a traditional IRA worth $100,000 as of Dec. 31, 2018. James’ IRA beneficiary is his wife who is age 69. Since James is age 72, he must take his traditional RMD even though he is still employed. His 2019 traditional RMD was calculated as follows:
$100,000 (IRA value as of 12/31/2018)/25.6 (life expectancy age 72) = $3,906
Example 2. Carol is a federal annuitant, age 76. Her TSP account balance as of Dec. 31, 2018 was $750,000. Carol’s TSP beneficiary is her spouse, age 78. Carol’s 2019 TSP RMD was calculated as follows:
$750,000 (TSP value as of 12/31/2018)/22.0 (life expectancy age 76) = $34,091
The CARES Act suspends all RMDs for calendar year 2020. To fully grasp the significance of the 2020 RMD suspension, consider the following examples and what would have happened had the CARES legislation not be enacted:
Example 3. Same facts as Example 1, except it is the year 2020. James is age 73, and James’ IRA as of 12/31/2019 was valued at $120,000. His 2020 RMD would be calculated as follows:
$120,000 (IRA value as of 12/31/2019)/24.7 (life expectancy age 73) = $4,858
Example 4. Same facts as Example 2 except it is the year 2020. Carol is age 77, and Carol’s TSP account as of 12/31/2019, was valued at $800,000. Her 2020 RMD would be calculated as follows:
$800,000 (TSP value as of 12/31/2019/21.2 (life expectancy age 77) = $37,736
At the time or soon thereafter that both James and Carol have to take their 2020 RMDs, the stock market value has decreased 20 percent since early February 2020, a result of events related to the coronavirus. James’ and Carol’s 2020 RMDs are determined by their IRA and TSP values respectively as of 12/31/2019 (when the stock market value was at a high point, before the coronavirus crisis became a reality in February 2020).
Both James’ and Carol’s retirement accounts are 20 percent lower, and, pre-CARES Act, their RMDs would have been further reduced the value of their account. But the CARES Act waives the RMD requirement during 2020 for James and Carol. This was perhaps one of the reasons why RMDs were suspended for 2020 – in order to prevent IRA and qualified retirement plan owners and participants from withdrawing from accounts that have lost value in which the amounts withdrawn were determined from account values that were significantly higher three months and before the coronavirus crisis became a reality.
It should be noted that the RMD suspension for 2020 also applies to inherited (“death”) IRAs. An inherited (“death”) IRA is an account that is opened when an individual inherits an IRA or employer-sponsored retirement plan after the original owner dies. An inherited IRA is also known as a “beneficiary” IRA.
A beneficiary may open an inherited IRA using the proceeds from any type of IRA including traditional, Roth, rollover SEP and SIMPLE IRAs. In general, assets held in the deceased individual’s IRA or retirement account must be transferred into a new inherited IRA in the beneficiary’s name.
Nonspousal beneficiaries may not treat an inherited IRA as their own. That is, they cannot make additional contributions to the account, nor can they transfer funds into an existing account they have in their own names.
Under the SECURE Act, nonspousal beneficiaries must withdraw their inherited IRAs within 10 years of the original IRA or retirement plan owner’s death. But the SECURE Act applies only to inherited IRAs that come into existence after 12/31/2019. Any inherited IRAs that came into existence before 1/1/2020 are not subject to the mandatory 10-year payout rule. Inherited IRA owners who inherited their retirement accounts from owners who died before 1/1/2020 have the option of the lifetime distribution option based on the inherited IRA owner’s life expectancy. But each year they must take an RMD from an inherited traditional IRA or from an inherited Roth IRA. While Roth IRA owners are not subject to the RMD rules, nonspousal inherited Roth IRA owners (in which the Roth IRA owner died before 1/1/2020) are subject to the RMD rules.
But under the CARES Act, inherited traditional and Roth inherited IRAs are suspended for calendar year 2020.
For additional questions regarding how the CARES Act affects the TSP, please contact the Thrift Savings Plan directly here: https://www.tsp.gov/ParticipantSupport/Content/contact/index.html or the ThriftLine at 1-877-968-3778.