As part of the Internal Revenue Service’s measures to stimulate the economy, the Coronavirus Aid, Relief, and Economic Security Act waives required minimum distributions (RMDs) during 2020 for individual retirement accounts and retirement plans, including workplace defined contribution plans (such as 401(k)s and Roth 401(k)s) and inherited accounts.
Given that most of these accounts have seen a significant decline in 2020 due to COVID-19 and its havoc on the economy and markets, and because RMDs are calculated based on the account value at the end of the prior year, this relief effort is meant to allow retirees and seniors to keep their money in place, in hopes of recouping some of their losses if we start to see some recovery. By not taking the distributions, your client may also be avoiding a larger tax bill. Last week, the IRS issued a news release reminding seniors and retirees of this available relief.
The waiver applies to anyone who’s subject to RMDs, regardless of age, including RMDs for individuals who turned age 70½ in 2019 and took their first RMD in 2020. The RMD suspension doesn’t apply to qualified defined benefit plans (for example, pensions).
What If a Client Already Took an RMD?
Those clients who’ve already taken their RMDs may roll the distributed assets back into their account within 60 days without taxes or penalties. The IRS has also issued guidance extending the 60-day rollover period until Aug. 31, 2020, meaning any distributions taken since Jan. 1, 2020 are eligible. Per the IRS, “if an individual has already taken an RMD in 2020, including someone who turned 70 ½ during 2019, the individual will have the option of returning the distribution to their account or other qualified plan.” RMDs taken in 2020 are considered eligible for rollover and can be rolled over to another IRA, another qualified retirement plan or returned to the original plan.
The usual one rollover per 12-month period limitation rule and the restriction on rollovers to inherited IRAs have also been suspended until Aug. 31, 2020, meaning individuals can roll over or recontribute multiple distributions, so long as it’s done prior to the deadline.
Although tax withholdings on completed distributions can’t be reversed, the taxes may be refundable on filing a 2020 return.