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"10 days left to reverse your 2020 RMD" by Julie Jason

An important deadline is fast approaching that applies to anyone who wants to reverse an RMD (required minimum distribution) from a retirement account in 2020. That deadline is Monday, Aug. 31.   

Here is the background: The Coronavirus Aid, Relief, and Economic Security (CARES) Act, which was signed into law on March 27, 2020, suspended RMDs for 2020 for everyone with IRAs and 401(k)-type accounts (but not defined-benefit plans. For more details, read my April 12 column.  

The suspension, which was retroactive to Jan. 1, 2020, came into effect at the end of March, after some people had already taken their RMDs for the 2020 year. What could they do if they wanted to take advantage of the suspension? 

The mechanism for putting back a withdrawal from an IRA is a rollover, but rollovers are limited by time (60 days) and frequency (only one per 12-month period).   

That left a gaping hole for early bird “RMD-ers” and an uneven playing field – hardly what Congress intended when the suspension was passed. I wrote a series of columns on the subject that you can read here.    

Three months later, on June 23, 2020, the IRS issued Notice 2020-51, offering the welcome relief that we were all waiting for.       

That notice redefined the 60-day rollover rule for this one purpose: to give more people who took RMDs in January and February – and in fact, any time before now – relief from the normal rollover rules. 

First, there is a new deadline (Aug. 31, 2020) to complete the rollover. That deadline is only 10 days away as of this writing. 

Second, the rollover “is not subject to the one rollover per 12-month period limitation.” 

Third, inherited IRAs are not excluded from 2020 RMD suspensions and are permitted to roll over (inherited IRA rollovers are not normally permitted).   

For more details, read IRS Notice 2020-51

If you took your RMD and want to reverse it, tell your financial adviser that you want to do so right away. You can roll over RMDs taken from multiple IRAs and other tax-deferred accounts if you wish. You can roll over all or part of any 2020 RMD – except for RMDs taken from defined-benefit plans.    

Let’s go through a few examples from readers. 

A widow I’ll call Melanie took her $300,000 RMD from her IRA in January. Of that amount, $200,000 transferred into her taxable account and $100,000 was withheld for federal income taxes. She does not need these funds for living expenses.   

Melanie will need to enlist her financial adviser to make sure the reversal takes place by Aug. 31. She will authorize a transfer of $300,000 to her IRA from her taxable account in order to “undo” the $300,000 withdrawal in full. 

The $100,000 that was sent to the IRS for tax withholding is stuck at the U.S. Treasury for now. That money will offset Melanie’s tax liabilities on her 2020 tax return. I confirmed with an IRS spokesperson that there is no mechanism for Melanie to request the Treasury to return the $100,000 that was withheld until she files her 2020 tax return. If that withholding causes a tax overpayment, she will be able to request a refund at tax time. 

Another reader, O.M., wants to reverse her RMD, which is held at a bank in a certificate of deposit. O.M. ran into a problem. The bank told her she could not redeposit the RMD “because the IRA was a one-year CD.” 

O.M. needs to go back to the bank to speak with a manager. Most banks offer non-CD IRAs. Or, O.M. can go online to a mutual fund company to set up a new IRA account to use to receive the rollover. Assume the RMD was $10,000. O.M. would deposit $10,000 (or less, depending on her cash needs) into the new IRA. That would satisfy the rollover rules for 2020 and avoid the income tax on the $10,000 RMD, assuming she rolled over the full $10,000. 

If you have any additional questions on the Aug. 31 date, email them to me as soon as possible at readers@juliejason.com. Don’t forget to tell me where you live.  

 Related columns

"Good News for Early Bird RMDs" by Julie Jason

"RMDs not required in 2020" by Julie Jason

"Time is waning for 2019 RMD distributions" by Julie Jason