As we discussed a few months ago, the federal government passed the Coronavirus Aid, Relief, and Economic Security (CARES) Act on March 27, 2020, in response to the global pandemic that continues to afflict our economy. One way the CARES Act provided relief for individuals was by waiving the annual obligation to distribute a portion of certain retirement accounts (e.g. IRAs, 401(k)s, etc.), known as a required minimum distribution, or RMD, for 2020. Since RMDs are included on a person’s tax return as earned income, the waiver of this requirement is helping numerous individuals avoid paying taxes on that income.
As part of the RMD waiver, some who had already taken their RMD for the year had the opportunity to “undo” the transaction by redepositing the money (plus any taxes withheld at the time of distribution). However, since the typical rules surrounding RMDs can be a bit complicated, there was some confusion as to who actually qualified for this “undoing.” This led the IRS to issue Notice 2020–51 this week, which clarified that anyone who has taken an RMD in 2020 has until August 31, 2020, to put the money back. This includes those who took RMDs from inherited IRAs, individuals who took their RMDs this year due to turning age 72 (or those who turned 70 ½ in 2019 and would have had to take the first RMD by April 1, 2020), and others who have taken their RMD for the year.
Individuals looking to take advantage of this new notice from the IRS should make some considerations before doing so, including:
1. the amount put back into the retirement account must be the full amount distributed, including any taxes withheld (any amount short of the total plus taxes will be included in the individual’s income for the year);
2. those who are typically in a high tax bracket but find themselves in a lower tax bracket this year due to COVID-19 may benefit from taking the RMD, paying less tax than they would normally pay; and
3. if a person has cash needs and can cover them with other, nontaxable accounts, it likely makes sense for that person to reverse the RMD.
The information presented in this article is for educational purposes only and is not meant to provide individual advice to the reader. There is no guarantee the information provided above relates to your personal situation. All financial situations are unique and should be advised as such.