Table of Contents:
Required Minimum Distribution Relief
Calling the year of 2020 “unexpected” is like calling Michael Jordan “good at basketball.” While true, “unexpected” is a hefty understatement. It is June 30th. Half of 2020 is behind us and it has been fifteen weeks since COVID-19 was declared a national emergency yet a vision for the second half of 2020 does not feel any more certain. With cases on the rise again, Congress debating a second round of stimulus, and the U.S. Treasury discussing pushing back Tax Day even further, it appears this “year of 2020” is far from over.
However, for retirees and other retirement account owners, one thing is now clear; required minimum distributions (RMDs) can be returned to retirement accounts by August 31st. On March 27th, President Trump signed a $2 trillion bill referred to as the CARES Act. This is the Act that provided for the stimulus checks to individuals and the Paycheck Protection Program (PPP) Small Business Administration (SBA) loans. Included in the CARES Act was relief for retirees and IRA beneficiaries which waived required minimum distributions (RMDs) for 2020. Last week on June 26th the IRS released Notice 2020-51 to allow all qualifying RMDs that were already taken to be deposited back into appropriate accounts by August 31st.
Returning Retirement Distributions Pre-2020
Returning retirement distributions is a fairly common practice referred to as a rollover. In a normal (pre-2020) world retirement account holders can transfer money between retirement accounts via a trustee-to-trustee transfer or an indirect rollover.
Trustee-to-trustee transfers are when one custodian or plan providers transfers the account balance to another custodial or plan provider. The account owner never touches the money in a trustee-to-trustee transfer and therefore these transactions are allowed with no limits on frequency or timing.
If the account owner touches the distribution and wishes to roll it back into a qualifying account this is called an indirect rollover. The account owner is limited to one indirect rollover per 365-day period and the rollover must be completed within 60 days. These rules exist to prevent constantly “loaning” your retirement savings to yourself. Notably, required minimum distributions are not allowed to be rollover over in any manner. In addition, if someone other than a spouse is a beneficiary of a deceased individual’s IRA that non-spouse beneficiary is not allowed to make an indirect rollover with the inherited IRA.
Returning Retirement Distributions in 2020
Required minimum distributions are calculated based on the fair market value of the retirement account on December 31st of the previous year. Many retirees and IRA beneficiaries choose to go ahead and take their RMD early in the year while others chop their RMDs up into monthly automatic distributions. The waiver of RMDs for 2020 on March 27th was welcome yet late news for many account holders. Retirees who had already taken distributions were left looking at the indirect rollover rules to try to return those distributions.
By March 27th almost all distributions taken in January could not meet the 60-day rollover rule. In addition, non-spouse beneficiaries of IRAs and those who had already completed one 60-day rollover in the past 365 days were completely barred from rolling over distributions. Without further relief these “early birds” were stuck with their distribution and the associated income tax liability on their 2020 tax returns.
IRS Says Forget the Rules
The IRS released Notice 2020-51 on June 26th allowing all would be RMDs to be rolled back into retirement accounts without regard to the 60-day or once-per-year rollover rules. This special rollover relief is granted until August 31st and is available for all distributions from defined contributions plans and IRAs up what the RMD would have been for 2020 if the CARES Act did not waive those RMDs.
Steve is a single retiree with a large IRA. His 2020 RMD was $30,000. In January of 2020, Steve took a $50,000 IRA distribution to purchase a new car. Steve is eligible to roll $30,000 back into his IRA by August 31st, 2020. The remaining $20,000 cannot be rolled over as the $20,000 was not a pre-CARES Act RMD but a discretionary distribution and the 60-day rollover window for the $20,000 has passed.
This guidance by the IRS is unprecedented as it flies directly in the face of existing law which they do not have authority to change. However, while somewhat troubling, given the circumstances and how taxpayer friendly the guidance is, they are unlikely to receive much, if any, opposition.
What Should You Do?
First, if you already took a 2020 RMD from your 401(k) or IRA and you do not need the money, consider rolling this amount back into the plan or IRA by August 31st. This will allow the funds to continue to grow in a tax deferred environment and will prevent you from having to report a taxable distribution on your 2020 tax return.
Second, look at your planned charitable giving for the second half of the year. Will you itemize on your 2020 tax return or take the standard deduction? If you will not itemize and are over 70½, consider making charitable donations directly from your IRA. If you will itemize, consider donating appreciated securities or cash instead of making donations out of your IRA for 2020 and begin donating your RMD again in 2021 by making a qualified charitable distribution.
Last, make sure to document your 2020 distributions and rollovers and communicate them to your CPA. Custodians of IRAs and 401(k)s are likely to report these distributions and rollovers in a variety of ways. Making sure to correctly report the transactions on your tax return is the most important step. If the IRA custodian provides a Form 1099-R that reports a taxable distribution and the CPA does not know it was rolled back into the account and reflects it as taxable on your tax return, the rollover was for not. Reach out to your qualified financial and tax advisor who knows your personal situation to determine what action is best for you to maximize your financial situation as a result of these rule changes.