Contributed by: Robert Ingram, CFP®
To combat the economic impact of COVID-19, Congress passed the Coronavirus Aid, Relief, and Economic Security (CARES) Act on March 27, 2020. The more than 2 trillion dollar stimulus package contained numerous provisions including an expansion of unemployment benefits, tax credit direct payments to qualified individuals, financial support to small businesses/healthcare facilities/state and local governments, and some changes to retirement account rules. One of the provisions affecting retirement accounts was to suspend Required Minimum Distributions (RMDs) for 2020. Individuals subject to RMDs for qualified retirement plans such as 401(k), 403(b) and IRA accounts are not required to take distributions this year (including beneficiaries owning inherited IRAs who were still subject to annual RMDs).
What does this suspension of RMDs mean for individuals who have already taken distributions prior to the CARES Act, but would not have if given the choice? If you have taken a distribution before March 27 is there a way to reverse or ‘undo’ the distribution?
Expanding The 60-Day Rollover Window For 2020
A retirement account owner that takes possession of a distribution from the account has 60 days from the date of withdrawal to complete a rollover into another eligible retirement account, for example, a rollover to an IRA. Doing so excludes the distribution from income that could be subject to taxes and penalties. This is referred to as the 60-day rollover rule; the IRS allows this one time per 12-month period. Please note that the one time per year rule does NOT apply to direct rollovers such a direct 401(k) rollover to an IRA.
Individuals who took a retirement account distribution prior to March 27 and were still within the 60 days since taking the distribution could have used the 60-day rollover rule to put their distribution back into their respective accounts, classifying it as a rollover. However, this window was very limited.
In April, the IRS issued the first notice of guidance extending the 60-day rollover rule in 2020:
What qualified?
Distributions taken on or after February 1, 2020 could be rolled over into the retirement account.
When must the distribution be rolled over into the retirement account?
The later of
60 days after receiving the distribution
July 15, 2020
This provided greater flexibility for individuals that had taken an RMD after January 31. However, it still did not cover those that received an RMD in January. Individuals that had already completed a once per year 60-day rollover within the last 12-months would also have been ineligible to use this rollover rule again to reverse their RMD. In addition, this rollover window would not apply to non-spouse beneficiaries with inherited IRA accounts, since rollovers are not allowed for those accounts.
IRS Extends Rollover Deadline For All RMDs Made In 2020 To August 31st
In June, the IRS issued further guidance that essentially allows all RMDs that have been taken in 2020 to be repaid. This IRS notice 2020-51 does the following:
Rollover deadline has been extended to August 31, 2020 and covers RMDs taken any time in 2020. This allows those who have taken RMDs as early as January to put the funds back into their retirement accounts by rolling over the funds if it is completed by August 31st.
This rollover to reverse RMDs taken in 2020 does not count as part of the once per year 60-day rollover. This would allow individuals to use the rollover to prepay their RMDs regardless of whether they had already used a 60-day rollover within the last 12 months.
Provides an exception allowing non-spouse beneficiaries to return RMDs to their Inherited IRAs in 2020.
A couple of points of note when considering repaying your RMDs taken this year
The IRS notice 2020-51 only applies to distributions representing your Required Minimum Distribution amount. Distributions other than your RMD amounts would be subject to the once per year 60-day rollover rule.
If you had federal or state taxes withheld when you took your required minimum distribution, these amounts cannot be reversed and returned from the federal or state treasuries. You could return your total gross RMD back to your retirement account, but it would have to be made out-of-pocket. Any excess withholding would be resolved next year when you file your 2020 tax returns.
While reversing this year’s required minimum distributions may provide some great benefits such as potentially lowering your taxable income in 2020 or allowing for a Roth IRA conversion as an alternative, everyone’s financial situation and tax planning needs are unique. For some folks, it could make sense to take RMDs if they expect higher income in the future that could fall in a higher tax bracket, for example.
Having a good conversation with your advisors can help you decide what is right for you. As always, if you have any questions, please don’t hesitate to reach out!
Robert Ingram, CFP®, is a CERTIFIED FINANCIAL PLANNER™ professional at Center for Financial Planning, Inc.® With more than 15 years of industry experience, he is a trusted source for local media outlets and frequent contributor to The Center’s “Money Centered” blog.
The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Raymond James does not provide tax or legal services. Please discuss these matters with the appropriate professional. Conversions from IRA to Roth may be subject to its own five-year holding period. Unless certain criteria are met, Roth IRA owners must be 59½ or older and have held the IRA for five years before tax-free withdrawals of contributions along with any earnings are permitted. Converting a traditional IRA into a Roth IRA has tax implications. Investors should consult a tax advisor before deciding to do a conversion.