Have You Taken a Required Minimum Distribution for 2020?
The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) was passed into law on March 27, 2020, and provides flexibility for retirement savers including temporary waivers for 2020 required minimum distributions (RMD) from an individual retirement account (IRA) or an employer-provided qualified retirement that is a defined contribution plan.1
2020 RMDs are not required as of January 1, 2020, through December 31, 2020. For taxpayers who have not taken any distributions for the year and do not want to take a distribution, the law is simple: The penalty for not taking an RMD does not apply for 2020. This waiver applies to individuals who turned 70 1/2 before 2020 and heirs of an inherited IRA/Roth or retirement plan account subject to RMDs. The next RMDs for these plans will be for calendar-year 2021.
Are taxpayers who took RMDs for 2020 prior to the passing of the CARES Act eligible to redeposit the funds without any negative tax consequences? We anticipate further guidance on this issue from the IRS; however, here are some potential options for taxpayers in the meantime.
Distributions Taken Between February 1, 2020, & July 15, 2020
If a taxpayer took an RMD on or after February 1, 2020, the taxpayer may be able to roll over such unwanted distribution to an eligible retirement plan by July 15, 2020. The first step is to determine if the funds are eligible to be rolled over under Section 408(d)(3), which generally provides that an amount distributed from an IRA to the IRA owner, or to the surviving spouse of the IRA owner, is not included in gross income if the distribution is rolled over to an eligible retirement plan no later than the 60th day following the day of receipt. In general, RMDs are not eligible for rollover. However, since the RMD requirements are waived for 2020 under the CARES Act, all unwanted distributions can be classified as non-RMD distributions and potential rollover amounts.
In addition, on April 9, the IRS issued Notice 2020-23, providing an extension of the 60-day rollover period to July 15, 2020, for rollovers originally needing to be completed on or after April 1, 2020, and before July 15, 2020. Any distribution (including unwanted RMDs) taken on or after February 1, 2020, can be rolled over until July 15, 2020.
Note that distributions from IRAs are subject to one rollback limit in a 365-day period. Thus, the rollover option is not available for such RMDs if the taxpayer completed a separate rollover within the preceding 365 days. In addition, the rollback option is not available on inherited IRAs with nonspouse beneficiaries.
Distributions Taken in January 2020
Unless the IRS issues further guidance, distributions taken in January 2020 will not qualify to be recontributed unless the taxpayer’s distributions qualifies under the coronavirus-related distribution rules. To qualify under these rules, the taxpayer, their spouse or a dependent must be diagnosed as COVID-19 positive, or they must be experiencing financial hardship as a result of being quarantined, furloughed or laid off, having to work reduced hours due to the coronavirus, being unable to work due to a lack of child care or closing or reducing hours of a business owned or operated by the individual. If the distribution qualifies as a coronavirus-related distribution, it may be rolled over to another retirement account for up to three years after the distribution has been received.
Taxes Withheld from 2020 Distributions
Without further guidance, it does not appear taxes withheld on the RMD can be returned even if the remaining funds are rolled over. When the taxpayer files their 2020 return, they will receive credit for the withholding.
If a taxpayer turned 70 1/2 in 2019 and had not yet taken their first distribution prior to the passage of the CARES Act and suspension of RMDs for 2020, the taxpayer can now waive both previously required withdrawals in 2020. If the taxpayer took the initial RMD in 2019, the distribution is not waived and cannot be recontributed.
As with most topics related to COVID-19, changes are being made rapidly. Please note that this information is current as of the date of publication. For more information, contact your BKD Trusted Advisor™ or use the Contact Us form below.
1 IRC §401(a)(9) applies to individual retirement plans and defined contribution plans described in §403(a), §403(b) or §457(b) if maintained by an employer described in §457(e)(1)(A). ↩