Originally posted on Forbes.com:
Last April, in “Why the 2020 RMD Suspension is Not Fair to All,” I recounted the story of an early bird “RMD-er.” Ronald took his 2020 required minimum distribution (RMD) in January, as he has since he started taking RMDs from his IRA a decade ago.
His motivation was simple: He didn’t want to forget taking his yearly RMD, since there was a steep IRS penalty (50%) for failing to do so.
CARES Act Suspension
When the CARES Act (with its RMD suspension provision) was signed into law on March 27, Ronald was pleased. He could save some money; not having to take the RMD would avoid income taxes on the withdrawal (RMDs are taxable as income reported on Form 1099-R).
But wait – he had already taken his RMD. Could he reverse it?
The mechanism to put back money withdrawn from a tax-deferred account such as an IRA is a “rollover,” but there are rules to be followed. The rollover must be completed within a 60-day window from the date of the withdrawal, and only one rollover per 12 months is permitted.
While late “RMD-ers” were free of RMD requirements for 2020, Ronald was left out. He couldn’t fit into the 60-day rollover rule to get his money back into his IRA. Having taken his RMD early in January, the timing just didn’t work for him under the IRS rollover rules.
Leaving people out if they took their RMDs in January was clearly not intended by the CARES Act: Early birds were not singled out by Congress when the law was signed into law.
When I researched suspension rules back in April, an IRS spokesperson assured me that IRS subject-matter experts were aware of the problem and were working on a solution.
Finally, it’s here.
Today (June 23, 2020), the IRS issued Notice 2020-51 that levels the playing field for all.
The notice clarifies that people who took their RMDs in January (and anytime this year) can redeposit their RMDs to accommodate the CARES Act RMD suspension for 2020 under new rules that apply to 2020 RMDs.
New Rollover Rules for 2020 RMDs
The method approved by the IRS today is a rollover, which normally has a 60-day and one-per-year limitation. Both of those requirements were waived today for 2020 RMDs. The RMD deposit can be treated as a rollover if accomplished before Aug. 31, 2020.
Here are the important details from the IRS notice.
This deals with the 60-day rule:
“In the case of an IRA owner or beneficiary who has already received a distribution of an amount that would have been an RMD in 2020 but for section 2203 of the CARES Act or section 114 of the SECURE Act, the recipient may repay the distribution to the distributing IRA, even if the repayment is made more than 60 days after the distribution, provided the repayment is made no later than August 31, 2020.”
This deals with the one-rollover-per-12-month rule:
“The repayment will be treated as a rollover for purposes of § 408(d)(3) of the Code, but will not be treated as a rollover for purposes of the one rollover per 12-month period limitation in § 408(d)(3)(B) and the restriction on rollovers for nonspousal beneficiaries in § 408(d)(3)(C).”
IRA Custodian Requirement
By the way, the notice also makes clear that IRA custodians have an obligation to notify IRA owners that no RMD is due for 2020. “This requirement is satisfied if a copy of the Form 5498 that is filed with the IRS is furnished to the IRA owner.”
All RMDs for 2020 Can Be Rolled Back
To reiterate, quoting from today’s IRS news release, “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 60-day rollover period for any RMDs already taken this year has been extended to Aug. 31, 2020, to give taxpayers time to take advantage of this opportunity.”
Quoting further: “The CARES Act enabled any taxpayer with an RMD due in 2020 from a defined-contribution retirement plan, including a 401(k) or 403(b) plan, or an IRA, to skip those RMDs this year. This includes anyone who turned age 70 1/2 in 2019 and would have had to take the first RMD by April 1, 2020. This waiver does not apply to defined-benefit plans.”
I’m sure you’ll be hearing from your accountant about this change. According to CPA, Bill Wilson, of Van Brunt, DuBiago & Company, LLC (Stamford, CT), communications with clients are already underway. “If taxpayers can afford to put RMDS back into to their retirement accounts then it makes sense to do so,” said Wilson. “Why pay taxes if you don’t have to?”
Today’s release is good news.
Thank you, IRS, for coming through for early birds.
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