(402) 397-5033 Jeff@omahaadvisors.com

By Sarah Brenner, JD
IRA Analyst

On March 27, the massive “Coronavirus Aid, Relief, and Economic Security Act,” or the “CARES Act,” was signed into law. The CARES Act includes a waiver of required minimum distributions (RMDs) for 2020. This waiver applies to company savings plans and IRAs, including both traditional and Roth inherited IRAs.

The waiver of RMDs for 2020 has raised many questions. One question that we have been hearing a lot is: What is the effect of the waiver on the “first money out” rule?

How the First Money Out Rule Works

The first money out rule says that the first money you take out of your IRA or plan in a year when you have to take an RMD is considered to be your RMD for the year. An RMD cannot be rolled over or converted. So, if you want to roll over your employer plan to an IRA or convert your traditional IRA to a Roth IRA, you need to take your RMD first. It can’t be rolled over or converted.

No First Money Out Rule for 2020

The 2020 RMD waiver means that we get a year off from this problematic rule. Since RMDs are waived, you can go ahead with a rollover or conversion without any concern about taking your 2020 RMD first, because there is no RMD to take.

This is really good news. The first money out rule is always confusing people. We have a lot of other problems right now, but this pesky rule is not one of them!

The elimination of the first money out rule means that there are no worries this year about rolling over your entire plan distribution to an IRA.

This is also a great opportunity for a Roth conversion. In 2020, you can convert your entire IRA to a Roth IRA without having to take the RMD first. Now all that money (which would be taxed anyway) is available for conversion.

If you do not need your 2020 RMD, you may still want to take it anyway and convert it to a Roth IRA. Sure, there will be a tax bill now, but the trade-off is tax-free earnings when the market recovers.

https://www.irahelp.com/slottreport/no-%E2%80%9Cfirst-money-out%E2%80%9D-rule-2020