The Coronavirus Aid, Relief, and Economic Security (CARES) Act provides for a variety of measures to aid the economy but also to protect retirees. One provision allows retirees to forgo taking RMD’s in 2020.
RMD amounts are based on the value of the account at the end of the previous year divided by the life expectancy as set forth in IRS mortality tables. Congress was concerned that retirees would need to sell stocks (within the IRA or 401(k)) at a steep loss to generate cash to make the RMD hence the RMD was waived for all of 2020. The waiver applies to retirement account subject to the RMD rules such as IRAs, 401(k)s, Roth 401(k)s, and inherited accounts. The waiver also applies regardless of age i.e., it includes original account owners over age 70½ (or 72, under the SECURE Act), original account owners who turned 70½ in 2019 but have not taken their distribution yet, and inherited-IRA beneficiaries of any age.
Here are some FAQ’s that I have run in to…
- Does the waiver apply to inherited IRAs? Yes—the waiver extends to inherited IRA’s (including stretch IRA’s) and extends to inherited IRAs with non-spouse beneficiaries which would normally need to be liquidated within 5-years of the original account-holder’s death.
- If I already took an RMD in 2020, can I reverse it? Yes—if the distribution was within the last 60-days, you should generally be able to put the money back as a rollover transaction. What you can’t reverse is the tax withholdings—for this, you would have to wait on filing your 2020 return. See my commentary below.
- I have an inherited IRA and already took an RMD for 2020, can I return the distribution? Inherited IRA distributions are not generally eligible for rollover.
- Does the waiver also extend to IRC Sec. 72(t) substantial equal periodic payments? No—because this type of distribution is not an RMD i.e., it is covered under a different set of rules.
Eligible rollovers for those who have already received RMD proceeds in 2020 – for those who have already received a RMD should consider the rollover provisions, if available. Consider this example…
- Joe, age 80, took a $60,000 RMD from his IRA on March 15, 2020. Federal tax withheld on this was $9,000. If within 60-days of the date of receipt, Joe can put the money back into his IRA in an otherwise valid rollover transaction. The rollover amount can be the net distribution amount or the gross distribution amount. Assuming that Joe rolls over the full distribution amount of $60,000 within 60-days of receipt, the federal tax withheld of $9,000 will be recovered with the filing of his 2020 return one year from now. There is no way to file a claim for a refund to get the tax withholdings back now.
Be very careful that you do not violate the once-per-12-month. Generally, a person who receives a distribution from his or her retirement plan or IRA can eliminate the tax on that distribution by contributing it (rolling it over) to an IRA within 60 days (provided the distribution is not an RMD and not from an inherited plan). The once-per-12-months rule is an exception to this general rule and provides that an individual who receives an IRA distribution (“second distribution”) cannot roll that distribution over into an IRA tax-free if within the 12 months prior to the second distribution the individual received another IRA distribution (“first distribution”) that he/she rolled over tax-free into an IRA.
- Suppose that Joe, in the example above, was dissatisfied with his IRA performance so on August 1, 2019, he moved the IRA to a different financial firm. Assume that he closed out the IRA at Firm X, received the check payment, and within 60 days deposited the funds to new Firm Y. Since the distribution was a qualified rollover, he is barred from doing another IRA-to-IRA rollover for any IRA distributions he receives within 12 months after Aug. 1, 2019 (the date of the first distribution). Thus, he is barred by the tax code from rolling the “RMD” he took from his IRA in March 2020 back into the IRA he took it from (or into any other IRA, for that matter).
Joe could have avoided this issue by using an IRA-to-IRA transfer instead of a distribution-followed-by-rollover transaction for the August 2019 transition from Firm X to Firm Y. An IRA-to-IRA transfer is not considered a distribution (from the first IRA) or a contribution (to the recipient IRA), and there is no numerical limit on such transfers. It is strongly recommended that whenever money is being moved from one retirement plan to another, a plan-to-plan transfer (also called an IRA-to-IRA transfer or a trustee-to-trustee transfer) be used instead of a rollover.
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