As part of the CARES Act, the requirement for taxpayers to take required minimum distributions (RMDs) has been waived. This is due to the drop in value for most investments as a result of the economic effects of COVID-19.
What are Required Minimum Distributions (RMD)
RMDs are required distributions from qualified retirement plans. They are are commonly associated with traditional IRAs, but they also apply to 401(k)s and SEP IRAs. The tax code does not allow taxpayers to indefinitely keep funds in their qualified retirement plans. Eventually, these assets must be distributed, and taxes must be paid on those distributions. If a retirement plan owner takes no distributions (or if the distributions are not large enough) then they may have to pay a 50% penalty on the amount that is not distributed.
RMDs historically have needed to begin in the year when the retirement plan owner became age 70½. However, a late 2019 tax law change (the SECURE Act) upped the starting age to 72 for years after 2019. The first year’s distribution can be delayed to no later than April 1 of the subsequent year. However, delaying the first distribution means taking two distributions in the subsequent year.
Required minimum distributions (RMD) waiver
The CARES Act required minimum distributions (RMD) waiver applies to the following:
- The 2020 RMD for taxpayers who turned 70½ before 2020.
- The 2019 RMD for taxpayers who turned 70½ in 2019 and chose to defer their first distribution to 2020.
- The 2020 RMD for taxpayers who turned 72 in 2020.
- The RMDs for beneficiaries.
Required minimum distributions rollover:
The 2020 waiver for RMDs was not announced until the CARES Act was passed on March 27, 2020. Normally, an RMD cannot be rolled over. But the CARES Act essentially changed 2020 RMDs into eligible rollover distributions, which can be rolled over within 60 days of being received. Some individuals subject to the RMD requirements had already taken their RMD before the CARES Act was enacted and did not have the opportunity to roll the RMD back into their retirement account if the 60-day rollover period had already expired.
That issue was alleviated by the declared disaster provisions extending the rollover period. Thus, any 60-day rollover period that ends on or after April 1, 2020, and before July 15, 2020, is extended through July 15, 2020. So if you took a distribution after the end of January, you can roll it back into the retirement plan. This would mean you would avoid being taxed on it in 2020, if you do so by July 15, 2020.
However, any part of the distribution from a traditional IRA or qualified retirement plan that you don’t roll over will be taxed. This means that if federal and/or state income tax was withheld from the distribution and you want to roll over the distribution, you will need to use funds other than those from the distribution in order to fully roll it over. Regrettably, the withholding can’t be refunded when you make the rollover. Instead, the withheld tax will be claimed as a credit on your 2020 return. In this case, your 2020 estimated tax installments and/or withholding on other income can be adjusted.
One caveat about a required minimum distributions
You are only allowed one IRA-to-IRA rollover within any 12-month period. So if you have already made an IRA rollover during the prior 12 months, then timing is critical. Even if that IRA-to-IRA rollover was made for a different account. Trustee-to-trustee transfers don’t count as rollovers.
For example, this action wouldn’t count as a rollover.
- if you moved your IRA from one brokerage to another by having the account directly transferred.
Unfortunately, those who took their RMD in January do not benefit from the extension to July 15, 2020. Unless, of course, the IRS provides additional relief.
And, unless further relief is provided, the required minimum distributions requirements will resume in 2021.
Please give us a call if you have questions or want to know pros and cons related to a rollover.
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