The CARES Act offered a waiver from taking required minimum distributions in 2020. This waiver covers those who would normally be required to take an RMD in 2020 from their IRA, another retirement plan account or as the beneficiary of an inherited IRA. Only RMDs from a defined benefit pension plan were not included in the waiver.
The original legislation provided relief for some of those who had taken their RMD prior to the act, allowing them to undo this distribution and save on taxes due for 2020. Recent updated guidance from the IRS has expanded the window for undoing RMDs taken in 2020.
Rules for Undoing an RMD in 2020
The original window for undoing an RMD for 2020 covered those distributions taken from Feb. 1 through May 15. The deadline to put those funds back into the IRA or other retirement account was set for July 15 to avoid paying tax on this money. This repayment option did not include RMDs taken from inherited IRAs.
Those who had taken their RMD in January were out of luck in terms of being able to undo the distribution.
Recent guidance from the IRS made several important changes to these rules that could impact your clients:
The ability to undo RMDs for 2020 has been extended to include distributions taken from Jan. 1 through June 30. The deadline to redeposit these funds back into an eligible retirement account has been extended to Aug. 31.
The IRS guidance now includes inherited IRA accounts in this RMD relief.
The redepositing of the RMD funds taken is being treated as a tax-free rollover. In the case of an IRA these transactions are not subject to the one rollover per 12-month period limitation.
This is important for any clients who may have taken multiple distributions -- for example, someone who may have their account set for a monthly distribution.
As with the original waiver provisions, the updated IRS guidance does not extend to RMDs connected with a defined benefit pension plan.
Only distributions up to the amount of the RMD that would have been required for 2020 without the RMD waiver are eligible to be undone. Any additional distributions for retirement accounts cannot be undone and will be subject to any applicable taxes for 2020.
What This Means for Retirement Savers
For those who need the money that they’ve withdrawn from their retirement accounts in 2020, there is nothing to do. However, many of your clients likely take their RMDs because they are required. They may not need the money and would prefer not to pay the taxes on these funds.
For those clients, the opportunity to undo these RMDs could be a welcome one and they will be glad to hear about this from you. They will also want your help and guidance in facilitating this process.
Benefits of Undoing an RMD in 2020
There are potential benefits for your clients who don’t need this money in undoing their 2020 RMD. Not having to pay taxes on these funds is in and of itself a very tangible benefit.
This will reduce your client’s taxable income for 2020. Besides the tax savings, this may result in some or all of their Social Security benefits not being taxed and/or their monthly Medicare Part B premiums may be reduced in the future when 2020 is used as the year to calculate these premiums.
Rolling these funds back into retirement accounts allows this money some extra time to grow on a tax-deferred basis. While we don’t know what the future holds for the markets, this is still a potential advantage for your clients.
For those clients who might be considering a Roth conversion, undoing their RMD presents an opportunity for them. They can do a Roth conversion in the amount of the RMD. Unlike in a normal year, they would not incur the double tax hit of the RMD and the Roth conversion. Additionally, the Roth conversion removes these funds from the client’s retirement account serving to reduce future RMDs, all else being equal.
For clients who have their accounts set for regular distributions in order to meet their RMD requirement, be sure you work with the client and their custodian to stop these distributions for the rest of 2020. They can be reinstated as needed for 2021.
For those clients with charitable inclinations, qualified charitable donations (QCDs) are still allowed from IRAs. Even though the age for RMDs was increased to 72 for those who had not reached age 70½ prior to Jan. 1, 2020, the age for QCDs was left at 70½. Depending upon the client’s situation, QCDs may still represent the best way for them to make charitable contributions.
The ability to undo RMDs for 2020 represents another planning tool for some of your clients who rely on you to make sense of these and the many other rules connected to their retirement plan accounts.