Generally, IRA and 401K plan owners are required to take a certain amount of money out of their accounts each year beginning in the year they turn 72.  These mandatory distributions are called required minimum distributions (RMDs).  The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) was signed into law on March 27th and intended to provide emergency assistance and health care response for individuals, families, and businesses affected by the coronavirus pandemic.

The CARES Act enabled any taxpayer with an RMD due in 2020 from a defined contribution retirement plan, including a 401(k) plan, 403(b) plan, or an IRA, to skip those RMDs this year. This includes anyone who turned age 70½ in 2019 and would have had to take their first RMD by April 1, 2020, under the law in effect before the enactment of the Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019, enacted on Dec. 20, 2019, as Division O of the Further Consolidated Appropriations Act, 2020, P.L. 116-94. The waiver of RMDs does not apply to defined benefit plans (Source: Journal of Accountancy).

Questions were raised regarding relief for taxpayers who took their RMDs prior to the enactment of the CARES Act.  Previous guidance provided that taxpayers who took RMDs between 2/15/20 and 5/15/20 could reverse the RMD before 7/15/20 to avoid paying tax on the withdrawn amount.  Those taxpayers who took their RMDs in January were unfortunately excluded from any relief.

The Internal Revenue Service (IRS)  issued a news release on June 23, 2020 announcing that anyone who already took a required minimum distribution (RMD) in 2020 from certain retirement accounts now has the opportunity to roll those funds back into a retirement account following the CARES Act RMD waiver for 2020.  The repayment will be treated as a tax-free rollover, but it isn’t subject to the “one-rollover-every-12-months” rule. Tax-free rollovers are also now available for 2020 RMDs taken by beneficiaries of inherited IRAs, per the IRS guidance released yesterday.

Rollovers aren’t available for 2020 distributions from a traditional pension (i.e., a “defined-benefit plan”), either.

The IRS extended the rollover deadline from July 15, 2020 to August 31, 2020.

Depending on the individual circumstances of the taxpayer (a lower tax bracket than normal, for example), retaining the RMD could be an advantageous tax strategy.  For taxpayers in higher tax brackets, the RMD could cause increased Medicare surcharges or other taxes that are dependent upon the taxpayer’s tax bracket or AGI.

The new guidance and the provision in the CARES Act provide an opportunity to make strategic tax decisions with regard to retirement account distributions.  Please reach out to our team or your tax advisors to discuss your individual situation and the options available to you with regard to RMDs as a result of this new guidance.

You can read the release by clicking this LINK.

Please reach out to cares@brinkersimpson.com with questions.

We are in this together,

Brinker Simpson & Company, LLC

Disclaimer: This alert is for informational purposes only and does not constitute professional advice. Information contained in this communication is not intended or written to be used as tax advice & cannot be used by the recipient to avoid penalties that may be imposed under the Internal Revenue Code. We strongly advise you to seek professional assistance with respect to your specific issue(s).

Source: Journal of Accountancy, IRS Newsroom