Are you withdrawing from your IRA or 401(k) because you must, due to “RMD” rules?
RMDs (required minimum distributions) are mandated by the tax laws. They apply to “owners” of an IRA or 401(k), beginning when they are in their 70s (age 72 if you were born after June 30, 1949; age 70 1/2 if you were born before July 1, 1949). RMDs apply regardless of age to those who inherit from an IRA owner. (Note that there are special rules for spouses who inherit.)
Because of the CARES Act (Coronavirus Aid, Relief, and Economic Security Act) that was just signed into law a few weeks ago (March 27, 2020), RMDs for everyone with IRAs and 401(k)-type accounts (but not defined benefit plans) are suspended for 2020. There are no exceptions in the provision, which you can read in Section 2203 of the CARES Act, “Temporary Waiver of Required Minimum Distribution Rules for Certain Retirement Plans and Accounts.” (Read the full act here: https://tinyurl.com/qvsvtcy.)
And the law says 2020, meaning the suspension of RMDs is effective for the full year —Jan. 1, 2020, to Dec. 31, 2020.
That brings up some practical questions, the answers to which may still evolve, depending on whether the IRS issues guidance.
Say you are over age 70 1/2 and have been taking your RMDs yearly. RMDs are waived for 2020. If you did not take your RMD yet, should you? That depends on whether you need the funds to live on. If you don’t, there is no reason to take the RMD, and there is every reason to avoid the tax hit of the RMD, as your withdrawal triggers “income” that is taxable.
What if you already took your RMD earlier in 2020? Can that money be put back into the IRA or 401(k)? This requires your tax adviser’s input, since he or she will be doing your 2020 tax return.
But here is the logic behind putting it back, using a hypothetical example that applies to owners of tax-deferred accounts, not inheritors.
Say your RMD was $10,000 for 2020. You withdrew the full amount on March 1, 2020. Normally an RMD cannot be rolled over. However, due to the CARES Act, it should be considered a distribution instead of an RMD. Attorney Natalie Choate of Nutter McClennen & Fish Law Firm sees it this way: What was an RMD is “magically transformed” into an "eligible rollover distribution" by the CARES Act.
Since the withdrawal was within 60 days of today, you would redeposit that distribution into the IRA under 60-day rollover rules. Among other things, those rules limit you to one rollover per 12 months.
Keep in mind that this rollover approach won’t work for inherited IRAs. According to Hayden Adams, director of tax and financial planning at Schwab Center for Financial Research (SCFR): “Inherited IRA distributions are not generally eligible for a rollover; therefore, assuming the IRS offers no other guidance, distributions that have already been taken can’t be re-contributed. However, it’s possible that a beneficiary affected by the coronavirus will be able to count the amount as a coronavirus-related distribution and re-contribute the amount.”
What if you withdrew your RMD in January? The 60-day limit will prevent a rollover unless there is relief, which is a possibility. So, your accountant will need to stay on top of developments and guide you on whether you can re-deposit those amounts as well.
Adams believes, however, that if you are able to apply Section 2202 of the CARES Act, which governs coronavirus impacts: “Broadly speaking, it’s an ’impact‘ if you, a spouse or somebody in your household got the virus, or if the virus negatively affected you financially (such as making you unable to work, or getting laid off). You may be able to count the distribution as coronavirus-related and re-contribute the amount over the next three years.”
On the other hand, if you need that withdrawal because you have no other financial sources, you may be forced to take those funds irrespective of the tax hit.
Read Hayden Adams’ thoughts in SCFR’s "Can You Forgo Taking RMDs in 2020?" (April 2, 2020) here: https://tinyurl.com/qu8vxn8.