Written by: Elissa Wurf, PhD, CPA, EA
The IRS has been issuing guidance this year in the form of notices, clarifying tax changes introduced in the CARES Act (Coronavirus Aid, Relief, and Economic Security Act) that was passed by Congress in March. The latest IRS notice, issued earlier this week, pertains to required minimum distributions (RMDs) from tax-deferred retirement accounts.
Earlier This Year – CARES Act
One of the changes originally made by the CARES Act was to suspend 2020 RMDs. Normally, those who have assets in certain tax-deferred accounts (including Traditional IRAs, SEP and SIMPLE IRAs, 401(k) and 403(b)s, as well as those who have inherited these accounts) are required to begin withdrawing the money once they reach the age of 70.5 (now increased to age 72 for those born in 1949 or later). When the money is distributed, the tax that had previously been deferred is finally assessed, ensuring that Uncle Sam gets his share.
While Congress had hoped to provide some relief to taxpayers by suspending the requirement for annual distributions in 2020, by the time the CARES Act was finally passed on March 27th, many people had already taken 2020 distributions. For those who took distributions after February 1st, a longstanding rule enabled them to return/rollover unneeded distributions to the issuing account within 60 days of the distribution. However, those who took distributions in January were ineligible for the intended CARES Act relief since they were not able to return the distribution within the required 60 days.
In addition, taxpayers taking monthly distributions from their accounts were limited to returning (“rolling over”) only one distribution due to another longstanding rule that allows only one rollover per 365 days. This penalized taxpayers taking distributions monthly and rewarded those taking distributions less frequently.
This Week – IRS Notice on RMDs
To provide relief for the inequities described above, on June 23rd, the IRS issued Notice 2020-51. This guidance modifies notices issued earlier in the year as follows:
- Required minimum distributions taken early in the year (January and the first half of February) can now be returned (“rolled over”) back to the IRA.
- This includes multiple (i.e., monthly) distributions, which will now NOT be subject to the one rollover per 12-month rule as was previously the case.
- This ALSO includes inherited (beneficiary) IRA distributions, which previously had been completely ineligible for rollovers.
- Because of the changes, the deadline for returning (rolling over) these funds has been extended to August 31, 2020.
Of course, not everyone who has taken a distribution will want to return it. Some people may need the funds for their personal cash flow needs for the year.
Another consideration is future tax rates, which are currently at low levels not seen since the early 1990s. Some industry thought leaders believe that the amount of stimulus relief that has been issued by the federal government may lead to tax increases in the future. Also, the outcome of November’s elections might make the possibility of future tax increases more likely.
If you are concerned about having unneeded RMD money taxed at higher rates in the future, you might want to keep the money in your individual or joint brokerage account (where just the interest and dividends as well as gains on sales will be taxed) and consider doing Roth conversions later this year and in the future. You may want to reach out to your Financial Strategist to determine what is best for you.
If you would like to return a distribution taken from your tax-deferred retirement account earlier this year, please contact your Financial Strategist (ideally by early August to allow time for processing the return before the August 31st deadline).