Photo of a woman who is considering whether she should take a RMD in 2020.

Your 2020 RMD: Take it or pass?

Highlights of the new 2020 RMD rules

Rules around required minimum distributions (RMDs) changed when the SECURE Act was passed on December 31, 2019, and the CARES Act on March 27, 2020.

  • As of 2020, the age for withdrawing from retirement accounts changed. Instead of taking an RMD at age 70½, you can wait until you’re 72. If you turned 70½ before December 31, 2019,1 you must take the RMD for 2019 even if you're not yet 72.2
  • For the year 2020, taxpayers can choose whether or not they take an RMD from certain eligible retirement plans and IRAs.3
  • The RMD suspension applies to you if you’re taking distributions from your retirement accounts.4 It also applies if you have an inherited IRA subject to RMDs.

What’s an RMD?

It’s the money you normally have to withdraw each year from retirement accounts like a 401(k), 403(b), 457, Roth 401(k), and traditional individual retirement accounts (IRA).5 For Roth IRAs, there’s no RMD until after the owner’s death.

An RMD is taxable income and is based on your age and account balances on December 31 of the year before. (As you get older, you withdraw more money.) It’s helpful to use an RMD calculator. If you don’t take the full required amount or miss the deadline, the amount you failed to withdraw is penalized at 50%. Ouch.

Special case: If you inherited an IRA, withdrawals are more complicated. It depends on whether the owner of the account died before or after 2020, and whether you’re the spouse or a non-spouse. Check the IRS guidelines, learn about changes in the SECURE Act, and consult a financial professional.

Why Congress made changes this year

Just like when they were suspended in 2009, the goal of “pausing” RMDs is to keep you from having to tap your tax-deferred accounts when the value is down, which would leave fewer assets in place to recover when the market eventually does.

“A 2020 RMD would be based on year-end 2019 balances, which was a great year for the markets,” says Heather Winston, CFP®, assistant director of financial advice and planning at Principal. “Unfortunately, as a result, your 2020 RMD is likely based on a higher dollar value than what those assets may be worth today. This means if you take an RMD this year, when your overall account balance is down, you’ll still pay taxes on that ‘higher’ income amount.”

You have a choice: Take your 2020 RMD or sit this year out.

It’s great to have options, but how do you decide what’s best?

Your first question is, “Do I need the money?” If the answer is yes, because you count on that income to cover some of your living expenses right now, then you may want to take it in 2020, just as you have in the past.

If the answer is “maybe,” or “no,” then you have a decision to make, so here are a few things to think about.

Reasons to consider taking your 2020 RMD

  • To reduce your total tax-deferred assets so the amount subject to RMDs on December 31, 2020 is lower. (That’s assuming RMDs resume for 2021, of course.)
  • To do a Roth conversion, moving money from a pre-tax account to a Roth IRA and paying taxes on it at the time of conversion. “If you expect to be in a higher tax bracket in the future, or you want to pass your money onto loved ones without creating a tax burden for them—converting some, or all, of your dollars to a Roth may be an option,” Winston says.
  • You have a temporary lower income this year. If your total income in 2020 is expected to be unusually low compared to what you’re expecting in 2021, it may be beneficial to take the RMD and pay a (potentially) lower tax rate on the withdrawal.
  • To make a qualified charitable distribution (QCD), where money can be paid directly from your IRA to a qualified charity. It reduces your gross income, and thereby, your taxes. Work with your financial advisor to make sure you follow the rules for a QCD.

Reasons you may not want to take a 2020 RMD

  • To reduce your taxable income. If you don’t need the money this year or you have other sources of income to make up the difference, suspending your RMD may reduce your taxable income.
  • You want your funds to potentially recover value when the markets improve. A lot of people don’t like being forced to take an RMD when the financial markets are down. “You can sit tight and give your assets time to recover from a volatile market,” Winston says.

Tip: If you’ve been getting your RMD on a regular schedule (such as once a year in June, or every month) and you don’t want to take it this year, reach out to your retirement plan(s). You may need to log in to your account or submit a form to suspend or change your RMD for 2020.

Can you get your RMD back if you already took it for 2020?

Maybe, but it depends when you took the withdrawal. If it was in January, you may be out of luck. Talk to a financial professional to find out what options you may have. To learn more about early 2020 RMDs, read this story from AARP.

Next steps?

Principal customers: How to reach us about RMDs

Contact your financial professional or call us. If you’re not sure which number to call, log in to your account for more information.

  • Annuities: 800-852-4450
  • Principal Bank: 800-672-3343
  • Principal Funds: 800-222-5852
  • Principal Securities: 888-774-6267
  • Retirement plans: 800-547-7754

1 Subject to certain limited exceptions provided under the Coronavirus Aid, Relief, and Economic Security (CARES) Act.

2 You may be able to delay RMDs for employer sponsored plans if you're still working.

3 Defined benefits (DB) plans are not included in the 2020 RMD waiver. If you’re supposed to take distributions from a DB plan, you should continue to do so.

4 Some retirement plans do not allow participants to suspend a 2020 RMD.

5 Depending on the type of accounts, you may have to take RMDs separately from each account instead of taking it all from one account.

The subject matter in this communication is educational only and provided with the understanding that Principal® is not rendering legal, accounting, investment advice, or tax advice. You should consult with appropriate counsel or other advisors on all matters pertaining to legal, tax, investment or accounting obligations and requirements.​

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