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Rewinding RMDs - IRS Greatly Expands RMD Rollovers for 2020

Do you ever sometimes wish you could go back in time? As financial planners we often dream about taking advantage of certain tax laws before they change, or knowing stock market returns in advance (because no one can consistently predict the market correctly!).  

Speaking of which, no one was predicting a global pandemic at the start of the year and knowing that in advance may have altered how many individuals would have handled their required minimum distributions from retirement accounts. Similar to 2009, RMDs do not need to be taken in 2020 thanks to the CARES Act. But this rule change did not occur until the end of March.  

While there was some accommodation for those who already took their RMDs allowing those who took them after February 1st of 2020 to put their RMD back into their IRA (or eligible other retirement account). But this did nothing to help those who took their RMD before February 1st.  

This was also true for those with inherited IRA accounts. Those who had not taken their RMD yet did not have to, but those who already took theirs had no option to put it back at all. In this case the early bird did NOT catch the worm.  

Luckily for those who did not procrastinate, the IRS released additional changes to returning RMDs and taking other distributions from retirement accounts. Here's what you should know about these new rules.  


Who can return unwanted RMDs? 

The biggest change to the regulations is that the eligible individuals who can return their RMD has greatly expanded. The new regulations, under Notice 2020-51, now include RMDs taken anytime in the year for both personal retirement accounts (IRAs, 401(k)s, etc.) and inherited (beneficiary) retirement accounts as well. The ability for those who inherited an IRA account to return an unwanted distribution has never been done before! This is a great opportunity for those who do not need, or want, the money from their retirement accounts to put those funds back and avoid taxation on it.  

These regulations go beyond just expanding who can put back their RMDs, but also allows more time to do it. Under the previous provisions, eligible unwanted RMDs needed to be returned by July 15th. However, the new notice extends this time frame to August 31st of this year.  

It is also important to note that a way people were able to bring back funds to an IRA in the past was through a 60-day rollover. What this means is that if you took money out of an IRA but returned it within 60 days it would count as a rollover, and thus, not be taxable to you. The caveat to this rule is that it can only be done once every rolling 12-month period. However, these Coronavirus returned RMD distributions are not considered 60-day rollovers. That means you can bring back the funds in chunks, or all at once, and don't need to be concerned with infringing on this rule. This is especially useful for individuals who take their RMD in periodic installments (such as monthly) and not in one fell-swoop.  

 

Other noteworthy changes 

Some other changes worth mentioning have to do with individuals who have retirement accounts but are not yet taking RMDs. The CARES act also provided relief for those under 59.5, for IRA accounts, to take money without being penalized through what’s called a Coronavirus Related Distributions. In order to qualify you, or another eligible person in your household, need to meet certain criteria (see our previous post for full details). In IRS Notice 2020-50 the eligibility requirements have been expanded to include additional individuals. These include those who have experienced adverse financial consequences (or a member of their household) defined as1: 

  • Being quarantined, furloughed, laid off, or work hours reduced because of COVID -19 

  • Unable to work due to lack of childcare due to COVID-19 

  • Closing or reducing hours of a business you own or operate due to COVID-19 

  • Having pay or self-employment income reduced due to COVID-19 

  • Having a job offer rescinded or start date delayed due to COVID-19 

 
 

Summary 

The changes the IRS made to required distributions and penalty free distributions from retirement accounts give individuals much more flexibility in how they handle their finances this year. For those who took an RMD but do not need it, more people can now return it to reduce their taxes. If you've fallen on hard times and need money, you now have more flexibility to take funds from retirement accounts without penalty.  

In either case, these are complex financial decisions that involve understanding your cash flow needs and tax situation. If you need assistance with your overall financial planning, we encourage you to reach out to one of our advisors 


1 https://www.irs.gov/newsroom/relief-for-taxpayers-affected-by-covid-19-who-take-distributions-or-loans-from-retirement-plans