Five Steps to Rolling Over Your 2020 (non-RMD) RMD
Retirement Daily Guest Contributor
By Denise Appleby
If you were at least age 70½ on December 31, 2019 you would have been required to take minimum distributions (RMDs) from your IRAs (except for Roth IRAs, as Roth IRA owners are not subject to these requirements).
If you had assets in an account under an employer-sponsored retirement plan, such as a 401(k) plan, including a Roth 401(k), the required minimum distribution (RMD) rules also apply to those accounts, and an RMD would have been due for 2020 unless you were still working for the employer at the end of 2019 and were permitted to defer your RMD past age 70½ until you retire.
The RMD rules also apply to beneficiary retirement accounts, including Roth IRAs.
But, a new tax law, the Coronavirus Aid, Relief, and Economic Security (CARES) Act, waives RMDs for 2020. Under this waiver, you do not have to take any RMD that was otherwise due to be taken in 2020. This includes any RMD that you were required to take for 2019 because it was your first RMD year, but you elected to wait until 2020 (usually by April 1, 2020) to take it.
Please note: RMDs were not waived for defined benefit pension plans.
But what if you already took that RMD amount? You can keep it, if you want to. You also have the option of returning it to an eligible retirement account as a rollover contribution providing you are eligible to do so. The following are five key steps to returning your 2020 RMD to your tax-deferred retirement nest egg.
Make Sure the Amount is Eligible to be Rolled Over
Amounts that would have otherwise been 2020 RMD amounts may be rolled over, but exceptions apply. For instance, if the RMD is made from a beneficiary account, it may not be rolled over, unless the beneficiary account is held by the surviving spouse of the deceased account owner, in which case the rollover would need to be made to a non-beneficiary retirement account for the surviving spouse (the spouse’s own retirement account).
Other exceptions that would prevent an amount from being eligible to be rolled over include amounts that miss the 60-day deadline and that do not qualify for a waiver, and a rollover from an IRA that would break the one-per-year IRA-to-IRA rollover rule (see below).
Meet the 60-Day Deadline
A rollover contribution must generally be made within 60 days of you receiving the distribution that is being rolled over. The 60-day deadline is waived in some cases. For example, if the 60-day deadline fell on April 1, 2020 to July 14, 2020, it is postponed to July 15, 2020. If you missed the 60-day deadline, consult with your tax advisor to determine if you fulfill any of the waiver provisions that apply to the 60-day deadline.
Make the Rollover to the Right Type of Account
A distribution may be rolled over only to eligible retirement accounts. Distributions from non-Roth accounts such as traditional IRAs and traditional 401(k) type accounts may be rolled over to another non-Roth account, which would result in the amount being nontaxable. Such amounts may also be rolled over to Roth accounts, in which case, the amount would be included in your income and any pre-tax amount would be taxable. An RMD amount from a Roth 401(k) type account may be rolled over only to another Roth 401(k) type account or Roth IRA, and would be excluded from your income.
If your RMD was taken from a traditional IRA, SEP IRA or SIMPLE IRA, and it is rolled over to another traditional IRA, SEP IRA or SIMPLE IRA, that is referred to as an IRA-to-IRA rollover. An IRA-to-IRA rollover is excluded from your income (nontaxable). However, you are permitted to perform only one IRA-to-IRA rollover during a 12-month period. If your rollover would break this rule, you may roll over the amount to a Roth IRA as a Roth conversion instead, in which case any pre-tax amount would be included in your income and would be taxable; or rolled over to a traditional account under an employer plan in which you are a participant, such as a 401(k), in which case the rollover would be nontaxable. Please note: Not all employer plans accept rollovers.
Meet the Plan/Custodian’s Operational Requirements
The administrator of your retirement account will likely have operational and documentation requirements that must be met before they will accept a rollover. For example, some require a rollover contribution form completed and signed to accompany the rollover amount.
Notify Your Tax Preparer/Tax Adviser
The payor (IRA custodian or plan administrator) will report the distribution amount to you and the IRS, on IRS Form 1099-R. The 1099-R should indicate that the amount is includible in your income and potentially taxable. Your tax preparer should override that by excluding the amount from income on your tax return and include an explanation of why it is excludable. Your tax preparer might need proof of the rollover, such as a copy of your account statement.
It’s Your Choice as Long as the Rules are Followed
Distributions of amounts that would have otherwise been RMD amounts are optional for 2020. You can take it if you want or need to. If it is scheduled to be distributed and you do not want the distribution to be made, contact the payor about canceling the scheduled distribution. If it was already taken and you want to restore the amount to your tax-deferred retirement nest egg, talk to a tax advisor or financial advisor who understands the rules that govern rollovers of distributions from retirement accounts, to help ensure that all the applicable rules and regulations are followed.
About the author
Denise Appleby consults on protecting retirement savings from costly mistakes. She has helped individuals save from a few hundred to millions of dollars by avoiding and/or correcting mistakes. She’s on Facebook/Twitter/Instagram at @ApplebyIRA and on LinkedIn at www.linkedin.com/in/deniseappleby/