Christmas in July!: Surprise Guidance by the IRS Concerning RMDs and Rollovers

 In Planning Insights, Strategy Updates

Anyone who took a Required Minimum Distribution (RMD) from a retirement account in 2020 will be very happy to learn that new IRS guidance says those who took a 2020 RMD can roll the money back into a retirement account by August 31st. IRS Notice 2020-51 provides rollover relief with respect to waived RMDs and even permits repayments to inherited IRAs.

The $2 trillion CARES Act that passed in March included a 2020 RMD waiver, an important rule that let some retirement account owners waive Required Minimum Distributions this year. It was welcome relief for retirees and those who have inherited IRAs.

Under the normal rules, once you hit 72, you must take RMDs from your own pretax IRAs and pretax IRAs inherited from a spouse. Children, grandchildren and others who have inherited IRAs (pretax IRAs and Roth IRAs) must take annual RMDs regardless of their own age.

The waiver meant that instead of taking money out this year, account holders could leave the money in and let it keep growing. But for folks who had already taken money out, there was only limited relief: a chance to put the money back within 60 days.

What makes this new ruling so special and truly a gift?

  • It helps early birds who took RMDs in January.
  • It helps beneficiaries (inherited IRA owners) who under the law were never allowed to return distributed money (“rollover”) — until now.
  • It helps people who have already used the once-per-year rollover rule and are not able to do another rollover — until now.
  • It even helps people who took multiple RMDs (through substantially equal payments).
  • Everyone has until August 31st to do the rollover.

For some people, especially if they’re in a low tax bracket this year, it might be wise to keep their RMDs and not put the money back in. It can be a very tax-efficient way to reduce funds in your IRA. But for others, where the 2020 RMD pushed them into a higher bracket, they get a welcome do-over. Return the RMD by August 31st to reduce your income which may also reduce Medicare surcharges or taxes on Social Security.

Other moves to consider include a Roth conversion or an IRA qualified charitable distribution. Typically you have to take RMDs out before you can do a Roth conversion. Now, with the RMD holiday, the first pre-tax dollars you take out, you pay the tax, and convert it. This year you can convert more before being pushed into a higher tax bracket. Another strategy for those who are charitably inclined is a Qualified Charitable Donation (QCD). If you’re 70 1/2 or older this year, you can give up to $100,000 directly from your IRA to a qualified charity. Normally it counts towards your RMD. If you give to charity, and like most taxpayers take the standard deduction, the QCD still leaves you ahead — even though you don’t have to take the RMD.

If you can take advantage of this new guidance and would like to return an RMD, please notify us promptly and we will be happy to assist you with the rollover. Also, please feel free to reach out to us if you have any questions or concerns. We hope you and your loved ones are staying safe and healthy.

Your Main Street Research Wealth Management Team

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