Between the SECURE Act’s passage at the end of 2019 and the CARES Act’s passage amid the coronavirus pandemic in 2020, Americans might be struggling to keep all of the changes to retirement and tax laws straight.
When it comes to retirement planning there have been a number of changes to how you can access money, required minimum distributions (RMDs) and IRA rollovers. While many of the SECURE Act changes were more permanent in nature, a lot of the relief efforts in the CARES Act are more temporary and require Americans to stay on top of all modifications.
One area that has seen a lot of change recently is RMDs. Here’s what you need to know.
How do RMDs work now?
Before the SECURE Act passed, retirement accounts like IRAs and 401(k)s were subject to RMDs once the owner reached age 70.5. The SECURE Act raised the age that withdrawals start to 72.
The first RMD is due for the year you reach the required beginning date. You can delay it to April 1 of the following year, but if you do, keep in mind that a second RMD is due that year by December 31.
When the CARES Act passed, it suspended RMDs from many types of retirement accounts including IRAs, inherited IRAs, 401(k)s and inherited 401(k)s in 2020. Defined benefit plans are not exempt from RMDs for 2020.
The SECURE Act reformed RMD rules, too. It used to be that whoever inherited an account could stretch out the RMDs over the course of their life. After the SECURE Act, many beneficiaries are required to take out all RMDs by the end of the 10th year following the year of death of the owner. Spouses and other beneficiaries can still stretch out distributions, but these rules are now in effect for people who pass away in 2020. (This new SECURE Act rule was not affected by the CARES Act.)
What if I already took an RMD in 2020?
Many people schedule RMDs to occur in January or every month. If you took an RMD earlier this year, you can return it to your account since they aren’t required this year. It might be challenging, but it is possible via a few different methods.
The simplest strategy is to do a rollover. This lets you roll money within 60 days from one type of retirement account to another. Typically, RMDs cannot be rolled over. However, since no RMDs are owed on these accounts in 2020, you can now roll over that distribution. If you did an RMD very early in the year, 60 days might have already passed and you can’t use this rollover strategy.
If you have taken a distribution from an IRA or 401(k) since February, a new IRS notice extends the 60-day timeline you have to roll it over to another retirement account. IRS Notice 2020-23 allows a deadline extension to July 15, 2020 for time-sensitive actions that were due on or after April 1, 2020 but before July 15, 2020.
Remember that you can only do one IRA to IRA rollover in a 12-month period. However, there is no such limit on direct transfers, where the money is transferred between the same types of accounts. Additionally, there is no limit on rollovers from a 401(k) to an IRA, IRAs to 401(k)s, or 401(k)s to another 401(k).
As you can tell, rollover rules are complex. It’s best to speak with a qualified financial advisor and tax professional before you take any rollover action.
What about distributions I took in January?
If you took an RMD in January, it’s a harder scenario to fix. The 60-day rollover period has passed, and the new extension granted by the IRS won’t help since it only applies to distributions made on or after February 1. However, one option might be a new feature in the CARES Act called a coronavirus-related distribution (CRD).
This temporary modification allows individuals to take distributions from a retirement account, like a 401(k) or IRA, and avoid the early withdrawal 10% penalty tax if they are younger than 59.5 as long as the individual, spouse or dependent is diagnosed with coronavirus or suffers financially from being laid off, furloughed or quarantined as a result of the coronavirus.
The maximum amount that can be withdrawn is $100,000, which the owner can repay over the next three years. If the distribution is repaid within the time limit it will go back into the retirement account as a tax-free rollover.
How does a Coronavirus Related Distribution impact the 60-day rule?
Remember that rule discussed earlier that limits the number of IRA to IRA 60-day rollovers you can do in a 12 month period? A good question is then how does the CRD impact this rule and once a year rollover limitation. Interestingly enough, it appears the government has decided to exempt the CRD repayments, being treated as a rollover, from the once a year limit. The Joint Committee on Taxation released a description of the new tax provisions in the CARES Act, and explained further details around the CRD provisions.
The Joint Committee on Taxation made it clear that over the three year window in which you can repay the CRD, you can make repayments in multiple years or multiple payments. As such, they cleared the way for multiple rollovers from IRAs in 2020 if the rollover is as a result of a CRD repayment.
So, if you took a January, a February, and a March IRA distribution thinking they were for RMDs, it is possible you can still roll these over as a CRD repayment. Since you could only do a 60-day rollover for either the February or the March distribution to an IRA based on the once-a-year rollover rule, the other two would be stuck as distributions. However, if these distributions qualify as a CRD there is not a limit on repayments for CRD, just the limit on total dollar amounts that can qualify ($100,000 per individual). While the CRD was not directly designed to fix missed RMDs, from a public policy standpoint it is in line with the goals of the two provisions. The government gave people the ability to avoid RMDs for 2020 and gave people the ability to withdraw money and pay it back over the next three years without penalty.
What happens with income taxes when a CRD is repaid?
So, if you take a CRD, the taxable portion would be included in income in 2020 or spread out ratably over the year of distribution and the following next two years, and not subject to a 10 percent penalty tax. The default is to have it spread over three years, but the individual taxpayer can choose to have it all included in 2020 income. If the money is repaid in 2022, and your tax returns for 2020 and even 2021 are already filed, you would need to file an amended tax return to claim a refund of the taxes attributable to the amounts of the CRD ratably included in income during those years. However, once repaid, you would not need to include any of the amounts in income moving forward. So, if you took a 2020 distribution, it qualifies as a CRD and you repay it before filing your 2020 taxes, you would not have to include that as income for 2020 tax purposes since it would be treated as a rollover in 2020 and not taxable.
What should I do next?
If you have a retirement account that could be subject to RMDs, reach out to your trusted financial advisor and tax professionals to make sure you understand the rules for 2020.
Next, if you are taking monthly distributions to meet your normal RMDs and want to stop, reach out because they likely won’t stop automatically. For those who have already taken an RMD in 2020, see if the coronavirus-related distribution or the extended 60-day rollover options can help you repay the money.
While most people in retirement have to take distributions to meet their retirement spending needs, others might want to keep their money invested and in a tax-deferred account for an additional year. You have options if you want to delay distributions in 2020, but you have to understand the ever-changing rules first.
