How It Impacts Your Required Minimum Distribution (RMD)

Please read the following addendum: On April 9, 2020 the IRS issued Notice 2020-23, which extends the 60-day-rollover window for distributions, so any distributions taken on or after February 1, 2020, can be rolled over until July 15, 2020.

On Friday, March 27th, 2020, the Coronavirus Aid, Relief, and Economic Security Act (the CARES act) was signed into law.  It creates an estimated $2 trillion emergency relief package that could significantly impact the U. S. economy and financial services industry.

The CARES Act suspends the requirement for those who are supposed to take a distribution (RMD) for 2020 from IRAs or qualified retirement plans. The waiver does not apply to defined benefit plans.  This portion of the bill is intended to help retirees and beneficiaries who would have been forced to withdraw 2020 RMDs based on 2019 year-end values that have since suffered due to the coronavirus pandemic’s impact on the markets.  It’s a welcome opportunity for many as 2019 saw record highs that have been quickly and suddenly erased.

Will my RMD(s) automatically be cancelled?

If you have an IRA that is scheduled to pay recurring monthly or annual RMD amounts that you wish to discontinue this year, you will need to act as this will not happen automatically.  To have the withdrawals cancelled, call your custodian or financial professional for assistance.  Otherwise, you don’t need to do anything and your RMD payments will continue uninterrupted.  For SFM clients:  to make changes to an upcoming IRA distribution, please contact our office two weeks prior to the scheduled withdrawal; if you’d like to reverse a distribution that was processed within the past 60 days, please contact us as soon as possible. 

What if I already took my RMD for 2020?

While there’s no specific provision in the CARES Act that says prior distributions can be returned, it’s assumed since RMDs are waived for 2020, an earlier distribution could be rolled back into the account by processing a 60-day rollover.  The 60-day rollover rule does not apply to distributions made to non-spousal beneficiaries of an inherited retirement account.

If there were multiple distributions, you cannot roll them all back into your IRA account as you’re only allowed one 60-day rollover every 12 months.  However, you roll one of the distributions that occurred in the past 60 days back into your IRA and convert the remaining funds to a Roth IRA as long as the conversion occurs within 60-days of the distribution.

Example #1:
Claire is 74.  Her 2020 RMD was $40,000, which she took on March 3rd.  Since she doesn’t need these funds for her living expenses, she’d like to put them back into her account.  She calls her advisor to see if this is possible.  She confirms that she has no other retirement accounts and has not completed any type of rollover in the past 12 months. 

She completes the necessary paperwork for the rollover and sends it to her custodian, along with a check for $40,000.  Claire had taxes withheld on her initial distribution, 20% federal and 5% state, but she wants to replace the full $40,000 into her account.  She can file for a refund of the taxes that were withheld when she completes her 2020 taxes.  The full distribution will be reported on IRS Form 1099-R and the rollover will be reported on IRS Form 5498.  She’ll need to ensure everything is properly reflected on her tax return.

Example #2:
Carl is 78.  When he turned 70.5, he set up monthly distributions from his IRA to be deposited to his checking account on the first of every month.  The amount of his monthly distributions total to his 2020 RMD requirement of $96,000.

Carl did not make any rollovers in the past 12 months, so he is eligible to make a 60-day rollover (redeposit funds back into his IRA) for either the March or April distribution.  He is not eligible to rollover both March and April because only one rollover is allowed every 12 months.  However, he read about converting his distributions to a Roth, and decided he could convert the March distribution and rollover the April distribution.  He cannot convert the January or February distributions because conversions must also take place within 60 days of the distribution.

Does the RMD suspension apply to inherited IRAs?

Yes, RMDs for 2020 are also waived for Inherited IRAs and beneficiaries of qualified plans.  In addition, for anyone’s Inherited IRA that was subject to a five-year payout, 2020 does not count, so the five-year payout essentially turns into a six-year payout.

What if I turned 70.5 last year but was waiting until April 1st of this year to take my first RMD?

If you are one of the few who turned 70.5 last year and were delaying your 2019 RMD until the 1st quarter of this year, you are eligible to skip your 2019 and 2020 RMDs.

Sophie turned 70.5 in 2019.  She had been working part-time and earning a substantial income, so she decided to wait until 2020 to take her first RMD.  She knew the deadline was April 1st and took her 2019 RMD on March 23rd to avoid missing the due date.  She didn’t need, or want, to withdraw her funds but knew she had to.  With the passing of the CARES Act, she can now roll those funds back into her IRA (provided she hasn’t made any other rollovers in the past 12 months) or convert them to a Roth as long as she does so by May 22, 2020.

For IRAs that were inherited by non-spouses in 2020, what about the new 10-year post-death payout rule included in the SECURE Act?

The new 10-year payout rule is NOT impacted by the CARES Act provision.  As this is the first year that the SECURE Act goes into effect, 2020 is the first year in which a beneficiary could inherit a retirement account and be subject to the 10-year payout.  The 10-year payout starts the first year after the year of death, making 2021 the first year this rule would apply.