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Why The 2020 RMD Suspension Is Not Fair To All

By Julie Jason, originally posted on Forbes.com:

Required Minimum Distributions (RMDs) Are Mandated By The Tax Laws — But Not In 2020. Can You Take Advantage?

Fairness Is An Issue For Some

Required Minimum Distributions (RMDs) are now suspended for 2020 for everyone with IRAs and 401(k)-type accounts (but not defined benefit plans) as a result of the Coronavirus Aid, Relief, and Economic Security (CARES) Act that became law March 27, 2020.  

What If You Are An Early Bird?

The suspension is effective for the full year —Jan. 1, 2020 through Dec. 31, 2020. The retroactive nature of the RMD suspension raises problems for people, like 84-year-old Ronald G., who always takes his RMD early in the year (“lest I forget”).   

If Ronald wants to redeposit that RMD, he risks penalties (no, Ronald, you will not be committing a “crime,” but you could be open to tax penalties for excess contributions to your IRA). See IRA Contribution Limits for more on excess contributions.  

That’s not fair, of course. In Ronald’s words, “No resident should miss this benefit (the suspension of RMDs for 2020) since it’s offered to all.”  Agreed.

The Intention Of The Act

There is no question that the RMD suspension legislation was intended to cover everyone, including people who took their RMDs early. I read the Act; I did not see any restrictions such as “except for Ronald” or “not for early birds.”

The retroactive nature of the RMD suspension doesn’t mesh with the 60-day rollover rule, which allows one to redeposit (rollover) a withdrawal of a distribution within 60 calendar days. January is not within 60 days of today. That causes unnecessary hardship and complexity for people, like Ronald, who took their RMDs before the CARES Act was adopted. 

IRS Guidance Is On Its Way

I have some good news, however, but it may not help with January 2020 RMDs.

A few hours ago, I was able to speak with IRS spokesperson, Eric Smith. The good news is that the IRS is getting ready to provide guidance. Here is what Smith said:   

“We anticipate issuing formal guidance addressing both the CARES Act suspension of the RMD rules for 2020, as well as last December’s tax law change, moving the age for starting required minimum distributions from 70.5 to 72.”

The most recent guidance from last week may not be enough, since it focuses on the extension of tax filings from April to July.

“If your rollover period hadn’t expired before April 1, you have until July 15 to complete the rollover,” said Smith. “Thus, someone who took their required distribution in February or March has, if they choose, until July 15 to roll it back into their IRA or an eligible retirement plan. Someone who turned age 70.5 in 2019 and waited until February or March to take their 2019 RMD could also qualify for rollover relief.”

What About January RMDs? 

That leaves out people who took their RMDs earlier in the year. For those people, see how your tax adviser would feel about using this line of reasoning.      

The IRS provides a mechanism to request a waiver of the 60-day rule for non-CARES Act situations, as discussed in this IRS FAQ.  Normally RMDs are not eligible for rollovers, but tax experts, such as attorney Natalie Choate of Nutter McClennen & Fish Law Firm argue that these RMDs should be considered eligible rollover distributions.

As such, should the 60-day waiver procedure apply to 2020 RMDs?   I think it should, assuming the IRS doesn’t provide relief to people like Ronald. Perhaps the method should be through a self-certification, which is described in the FAQ; you can also watch an IRS Video on Rollover Waivers.  

Could A Self-Certification Work?

The model certification letter provided in the FAQ would have to be adapted, of course, to reflect the rationale behind the request for a waiver.

Consider this as a possibility to discuss with your tax adviser – what if the self-certification said the following?    

“I certify that I have not done a rollover within the last 12 months. I certify further that I withdrew my 2020 RMD before the CARES Act suspension of RMDs for 2020 became law. After I learned of the suspension, which is retroactive to January 1, 2020, I redeposited the RMD into my IRA. As a result, since the cause of my missing the 60-day window was not within my control, and my desire to do the rollover was due to the suspension permitted by the CARES Act, I request a waiver of the 60-day rule.”

Keep in mind that rollovers (and waivers) are not available for inherited IRAs.  

Let me state emphatically that you need to work through your tax adviser before taking any actions. Don’t even think of doing this on your own.  

Who Takes RMDs? 

You are required to take RMDs from your IRA or defined contribution plan, such as a 401(k), if you are either over 70 1/2 or you have inherited an IRA or a 401(k).  Since beneficiaries of inherited IRAs cannot do rollovers, the IRS needs to address relief for them as well as owners of IRAs.

More From The IRS

Take a look at the Coronavirus-related extension relief from last week as well as  IRS Notice 2020-23 and the 139 page Revenue Procedure 2018-58, specifically Section 8.  Smith pointed out Section 8 as it lists the retirement-related actions, one of which is the 60-day rollover period. Smith notes that the extension relief impacted any actions due to be performed on or after April 1, 2020 and before July 15, 2020.

What If You Need The Money?

If you haven’t taken your 2020 RMD yet, don’t unless you need that money to live on. 

If you need the RMD money for living expenses, do you have a taxable account that you can take the withdrawal from instead of an IRA? If so, use the taxable account, again to avoid income taxes on the withdrawal, but be sure to check your unrealized gains if you need to sell positions to fund the withdrawal. 

Fairness For All?

Hopefully, the IRS will provide relief covering all who want to take advantage of the RMD suspension for 2020 by redepositing their RMDs at any time before the end of 2020, whether they are IRA owners or beneficiaries of inherited IRAs (and other tax deferred accounts). In my mind, that’s the only way fairness can be achieved.

We have to wait and see.

To read Julie Jason's books, go to https://juliejason.com/books/julies-books.