If you received a Required Minimum Distribution (RMD) in 2020, you should take careful note of guidance contained in the recently issued IRS Notice 2020-51 regarding the CARES Act’s waiver of 2020 RMDs and a taxpayer’s ability to rollover such distributions.
Prior to the CARES Act, distributions eligible to be rolled over to a retirement plan (including an IRA) within 60 days from the date of receipt, excluded:
- Required Minimum Distributions (RMDs),
- Distributions that were part of a series of substantially equal period payments made over a specified period, and
- Distributions made on account of a hardship experienced by an employee.
Other exclusions form eligible distributions for the 60-day rollover were inherited IRA and inherited ROTH IRA distributions or more than one 60-day rollover within a twelve-month period.
The tax code allows the IRS to waive the 60-day limit to rollover distributions under certain circumstances and the COVID-19 pandemic has proven to be such a circumstance.
Proceeding the pandemic, the SECURE Act included provisions impacting RMDs for 2020. The Required Beginning Date (RBD) for required distributions was moved from the well-known “April 1st of the year after an individual reaches age 70 ½” to “April 1st of the year after an individual reaches age 72”, with the age change only affecting individuals who turned 70 ½ after December 31, 2019. Thus, there are now two sets of RMD rules, one for people turning age 70 ½ before December 31, 2019 and one for people turning age 70 ½ after.
In response to the pandemic, the CARES Act temporarily waived for 2020, the RMD’s required to be made to employees, IRA owners and “beneficiaries of after-death distributions” from defined contribution plans, specifically an IRA, 401(k), 403(a), 403(b), and 457(b). The waiver also made the date initial RMD’s when an account owner turned 70 ½ in 2019, no longer due by April 1, 2020.
For an individual who turns 72 in 2020, no distribution is required for 2020 and no distribution will be required on April 1, 2021 which would otherwise have been the RBD. In calendar years after 2020, RMDs will still be due and for an individual whose RBD would have been April 1, 2021 under the SECURE Act. Instead, the RMD for 2021 will need to be made no later than December 31, 2021.
Notice 2020-51 extends the opportunity for taxpayers to return an RMD that was distributed in 2020 but was no longer required to be distributed under the CARES Act, to August 31, 2020. Distributions from Defined Benefit Plans are not covered by these new rollover provisions.
Specifically, IRS Notice 2020-51 helps taxpayers by allowing rollovers, if made by August 31, 2020, as follows:
- For individuals who took any RMD from a defined contribution plan in 2020 and prior to August 31, 2020.
- Beneficiaries of inherited IRAs who already took a 2020 RMD.
- Beneficiaries who received multiple RMD payments in 2020 if part of a series of substantially equal amounts.
- Beneficiaries of multiple RMD’s in 2020 now are allowed multiple rollovers instead of just one rollover in a 12-month period under the 60-day rule.
- Recipients of distributions taken in 2020 by individuals who thought that they needed to take a 2020 RMD as a result of turning age 70 ½ in 2020 and who were no longer required to take such a distribution as a result of the SECURE Act, until the year they reached age 72 (these were no longer technically considered to be RMD’s but can still be rolled back).
IRS Notice 2020-51 includes 12 Q&A’s some of which are summarized below:
- An IRA plan need not be amended to include the 2020 RMD Waiver.
- A plan that permits an employee or beneficiary to elect a 5-year or life expectancy rule can extend the deadline for the decision to end of 2021.
- If an employee’s death occurred in 2019, a non-spouse designated beneficiary has until the end of 2021 to make a direct rollover and use the life expectancy rule.
- It is possible spousal consent may be required to suspend distributions including 2020 RMDs and restart them in 2021 (check with your plan).
- Distributions can be rolled back into the same plan if the plan permits rollovers and the rollover meets the specified waiver requirements.
- A payor does not have the option of treating a 2020 RMD paid from a plan in 2020 as being subject to the mandatory 20% withholding rate for eligible rollover distributions.
- Recipients of a series of substantially equal periodic payments under “the RMD method” who stop taking RMDs in 2020 other than due to death or disability’ would be deemed to have a modification of such series of payments which could subject them to recapture tax.
- An IRA trustee, issuer, or custodian must notify an IRA owner that no RMD is due for 2020 by furnishing a copy of Form 5498.
Tax Planning Around CARES Act related RMD Rules
If you have not already filed your 2020 1st and 2nd quarter estimates, rolling back in, a RMD that you received in 2020 could reduce your 2020 estimated tax payments which are due on July 15, 2020. If you have already filed these quarterly estimates, you could reduce your 2020 3rd quarter and 4th quarter estimates by making these rollovers by August 31, 2020.
Reducing 2020 income by no longer having taxable RMD’s can reduce Medicare premium surtaxes which are based on your Adjusted Gross Income (AGI). There may also be a reduction in the taxable portion of an individual’s social security and Medicare liabilities if not taking the 2020 RMD reduces income below the taxable threshold for Social Security Benefits.
This is also an excellent time to consider a full or partial conversion of a traditional IRA to a ROTH IRA. Dependent on multiple factors, the tax savings to IRA plan holders and their heirs can sometimes be significant. Further, IRA beneficiary designations should also be reviewed to ensure they are as advantageous as possible.
If you are philanthropically minded and over age 70 1/2, another consideration is the permitted direct contribution from an IRA to a charity of up to $100,000. This allows you to reduce your AGI which would otherwise be increased by your IRA distributions and which can then impact the Medicare premium surtax as well as the taxability of your Social Security benefits.
The IRS also released Notice 2020-50 almost simultaneously with Notice 2020-51, relating to COVID 19 related qualified plan loans (maximum loan limit raised to $100,000 from $50,000), the tax treatment of COVID 19 distributions, as well as the ability to repay certain distributions back to the plan within 3 years and amend (if necessary) any of these previously taxed distributions. This will be more specifically addressed in a forthcoming Tax Warrior blog.
If you need help determining how these provisions affect you, call on us. In the meantime, please continue to visit our COVID-19 Tax Resource Center for up-to-date information on how the coronavirus may affect your tax filing, payments, and planning.