If you have already taken a required minimum distribution (RMD) from your retirement account in 2020, you should pay attention to the new guidance from the Internal Revenue Service (IRS). According to IRS Notice 2020-51, those who took an RMD in 2020 can roll the money back into their retirement plan by Aug. 31, 2020. The notice further provides rollover relief to waived RMDs and allows for repayments to inherited individual retirement accounts (IRAs). Doeren Mayhew’s CPAs and advisors further explore the benefits of the new guidance.

Retirement Relief from the CARES Act

When the $2 trillion Coronavirus Aid, Relief, and Economic Security (CARES) Act passed in March, it included a waiver allowing retirement plan holders to waive RMDs. This waiver was welcomed by retirees and those who have inherited IRAs.

Historically, once you turn 72, you are required to take RMDs from your pretax IRAs, as well as pretax IRAs inherited from a spouse. Your children, grandchildren or other family members who have inherited IRAs (pre-tax or Roth) must take annual RMDs no matter their age. The CARES Act’s waiver, however, states that instead of taking money out this year, plan holders may leave the money in and continue to grow it. Individuals who had already taken money out were offered limited relief, as they had an opportunity to put the money back into their accounts within 60 days. In April, the IRS issued a notice saying those who took out RMDs between Feb. 1, 2020 and May 15, 2020 were able to put the money back by Jul. 15, 2020. Its most recent guidance extended the deadline, allowing individuals to recontribute it to an eligible plan or IRA by Aug. 31, 2020.

Who Does the New Guidance Benefit?

Virtually all plan holders will experience some level of relief, including:

  • Those who took out RMDs right at the beginning of 2020
  • Inherited IRA owners who could never do a rollover (until now)
  • Individuals who violated the once-per-year rollover rule and couldn’t do another rollover (until now)
  • Those who took multiple RMDs

Roth Conversions and IRA Charitable Rollovers

Individuals should also consider Roth conversions or IRA charitable rollovers during this opportune time. Normally, plan holders must take out RMDs before they can do a Roth conversion. Now, the tax is paid from the first pre-tax dollars you take out and then you can convert it. Even better, you’re able to convert more before being bumped up a tax bracket. If you’re at least 70 ½ this year, you may donate up to $100,000 from your IRA to the charity of your choice as a charitable IRA rollover (also known as a charitable qualified distribution). Typically, it counts toward your RMD, but if you donate to charity and take a standard deduction, the charitable IRA still leaves you ahead (even if you don’t take the RMD).

Extended Deadlines

Along with the promising RMD relief, the 2020 waiver also presents the extension of deadlines for individuals and their beneficiaries in the event of death.

Electing the Five-Year Rule or Life Expectancy Rule –  If a plan allows for an employee or their beneficiary to choose whether the five-year rule or life expectancy rule counts for determining RMDs, the deadline for the decision is the end of the calendar year following the calendar year of the employee’s death.

Direct Rollovers to Non-spouse Designated Beneficiaries – The waiver also extends the time to make a direct rollover for a non-spouse designated beneficiary who died in 2019. If the five-year rule is applicable to a benefit under an eligible plan, the non-spouse designated beneficiary determines the amount not eligible to be rolled over since it’s an RMD using the life expectancy rule for a distribution made before the end of the year following the year in which the individual died. Non-spouse designated beneficiaries now have until the end of 2021 to use the life expectancy rule and make the direct rollover.

What Should You Do with Your RMDs?

For those who are in a lower tax bracket this year, keeping the RMDs and not putting the money back in may be wise. It is a tax-efficient method of getting money out, as many Americans tap into their retirement funds to gain financial relief from the COVID-19 pandemic. Now that the IRS recently expanded the COVID-19-related eligibility for taking distributions and loans from their retirement funds, this is a popular option many have taken advantage of. Those who were pushed into a higher tax bracket from their 2020 RMD are fortunate enough to essentially get a second chance at how they handle their RMDs. Individuals can return their RMD now to reduce income, which could in turn reduce Social Security tax or even Medicare surcharges.

IRA owners or beneficiaries who have already received a distribution my repay the distribution to the corresponding IRA, even if it is repaid more than 60 days after the distribution (but no later than Aug. 31, 2020). Repayments will be treated as rollovers, which means they’ll be subject to the one-rollover-per-12-months limitation or as rollovers for non-spousal beneficiaries.

Plan Amendments for Sponsors

The new guidance also offers plan sponsors a sample plan amendment for defined contribution plans to help implement waiver rules. Plan amendments are required to be adopted no later than the last day of the plan’s first year, beginning on or after Jan. 1, 2022 (or Jan. 1, 2024 for governmental plans). Amendments must reflect the active plan’s effective date. Timely plan adoptions should be proven by a written document signed and dated by the employer, including adopting employers of pre-approved plans. IRAs are not required to be amended at this time.

Need Guidance?

If you have any questions about whether to take out an RMD, Doeren Mayhew’s dedicated CPAs and advisors are here to help you navigate your unique financial situation. Contact us today.