Anybody who took a required minimum distribution from a retirement account in 2020 should take a look at new IRS guidance that says those who took a 2020 RMD can roll the money back into a retirement plan by August 31.
IRS Notice 2020-51 provides rollover relief with respect to waived RMDs, permits repayments to inherited IRAs, and includes Q&As for employers and employees navigating the 2020 RMD waivers and rollovers.
“It’s unbelievable! It’s almost like they broke all the tax rules to give people relief!” says Ed Slott, a CPA and IRA expert in Rockville Centre, New York. “Everybody wins!”
The $2 trillion CARES Act, passed in March, included a 2020 RMD waiver, an important rule that let some retirement account owners waive required minimum distributions. It was welcome relief for retirees and those who have inherited IRAs.
Under the normal rules, once you hit 72, you must take RMDs from your own pretax IRAs and pretax IRAs inherited from a spouse. Children, grandchildren and others who have inherited IRAs (pretax IRAs and Roth IRAs) must take annual RMDs regardless of their own age.
The waiver meant that instead of taking money out this year, account holders could leave the money in and let it keep growing. But for folks who had already taken money out, there was only limited relief: a chance to put the money back within 60 days for some eligible account owners. Then in April, the IRS issued a notice that said those who took an RMD between February 1 and May 15 could put the money back in by July 15.
Just how generous is the new rollover guidance? It helps early birds who took RMDs in January. It helps beneficiaries (inherited IRA owners) who under the law were never allowed to do a rollover—until now. It helps people who violated the once-per-year rollover rule who were never able to do another rollover—until now. It even helps people who took multiple RMDs (through substantially equal payments). They too can put money back in. Everyone has until August 31 to do the rollover.
For some people, especially if they’re in a low tax bracket this year, it might be wise to keep their RMDs and not put the money back in. “You might find it’s a very tax-efficient way to get the money out,” Slott says. (Many folks facing financial stress due to Covid-19 are tapping their retirement accounts, and the IRS recently expanded coronavirus-related eligibility for taking loans and distributions from IRAs and 401(k)s.)
But for others where the 2020 RMD pushed them into a higher bracket, they get a welcome do-over. Return the RMD now to reduce your income and that might reduce Medicare surcharges or tax on Social Security. Another example: “Someone in their 40s in their peak earning years who inherited an IRA from a parent, the last thing they needed was income from an inherited IRA. Now they can put it back and eliminate the tax bill,” Slott says.
Other moves to consider include a Roth conversion or an IRA charitable rollover. Typically you have to take RMDs out before you can do a Roth conversion. Now, with the RMD holiday, the first pre-tax dollars you take out, you pay the tax, and convert it. You can convert more before being pushed into a higher tax bracket. If you’re 70 1/2 or older this year, you can give up to $100,000 directly from your IRA to charity in what’s known as a charitable IRA rollover, or a charitable qualified distribution. Normally it counts towards your RMD. If you give to charity, and like most taxpayers take the standard deduction, the charitable IRA rollover still leaves you ahead—even though you don’t have to take the RMD.
I cover personal finance, with a focus on retirement planning, trusts and estates strategies, and taxwise charitable giving. I’ve written for Forbes since 1997. Follow me on Twitter: @ashleaebeling and contact me by email: ashleaebeling — at — gmail — dot — com