On June 23, 2020 the IRS announced that reversing an RMD will be allowed until August 31, 2020. Previously, the CARES Act, which was signed into law in March, temporarily waived RMDs for the entire 2020 calendar year. However, many people had already taken his or her RMD for the year. This new guidance will allow those who did, to reverse course and return the funds back to their retirement plan(s).
What is an RMD?
A required minimum distribution, or RMD, is the amount of money one is required to withdraw once he or she reaches a certain age. Starting in 2020, that age is 72. Previously, the starting RMD age was 70 ½. The SECURE Act upped the age to allow more time for tax-deferred savings, a welcome change for everyone. The amount is calculated based on your age and the amount of money in your plan. Almost all retirement plans are affected by the RMD rules. The one major exception is Roth IRAs.
RMDs are also required by individuals who inherit a retirement plan. A lot depends on what type of account it is, and who you are to the deceased (spouse vs. non-spouse). Learn more about the RMD rules on the IRS website.
Required distributions are mandatory because the IRS wants their cut of your money. Funds saved in a retirement plan are tax-deferred. Traditional plans are funded with pre-tax money, meaning you contribute to the plan before taxes are taken out. The taxes only become due once you withdraw the funds from your account. Obviously, you can’t completely avoid taxes, so the RMD rules are in effect so you know when you must start paying up. Failure to take your full RMD in a given year, will lead to a 50% penalty on the amount that was not taken. This is in effect until you rectify the situation. It’s imperative you take you RMD each year once you turn 72.
The CARES Act Impact
As mentioned, the CARES Act suspended all RMD payments for 2020. It enabled any taxpayer with an RMD due in 2020 from a defined-contribution retirement plan, including a 401(k) or 403(b) plan, or an IRA, including a Self-Directed IRA, to skip those RMDs this year. This includes anyone who turned age 70 ½ in 2019 and would have had to take the first RMD by April 1, 2020. This waiver does not apply to defined-benefit plan.
In addition, under the June 23, 2020 guidance, the IRS announced that an IRA or 401(k) owner or beneficiary who has already received a distribution from an IRA of any amount that would have been an RMD in 2020 can repay the distribution to the IRA or 401(k) by August 31, 2020.
The idea behind this provision is the with the equity markets down this year, older Americans who can refrain from taking money out stand to benefit by making it easier for their balances to recover. Some individuals over the age of 70 ½ took out some or all of their RMD amount as a distribution prior to the onset of COVID-19 in March 2020. A portion of these individuals have since put the money they withdrew back into the retirement account using a tax rule that permits account owners to do so within 60 days. However, this option remained off-limits to people who took RMDs in January. Now, anyone who took an RMD in 2020 can return the funds. The deadline for anyone who wishes to return RMDs taken in 2020 is Aug. 31. The suspension of RMDs this year—and the flexibility to put the money back—also applies to retirement account holders who turned 70 ½ in 2019 but delayed taking their first RMD until 2020. One must simply return the RMD amount withdrawn in 2020 to any retirement account. Of course, an individual is not required to return the funds and can take an RMD or any size distribution subject to applicable tax rules.
The new guidance by the IRS is not expected to help the majority of RMD retirement account owners since many individuals over the age of 70 ½ count on the income from their retirement account to live off, which is even more important as a result of the financial hardships caused by the COVID-19 virus. This provision will generally only help the more affluent who are less reliant on their retirement account funds to help subsidize their living expenses and do not need to withdraw these funds. In addition, the timing of the release of the new RMD rules is somewhat perplexing, since the S&P has almost erased all its COVID-19 losses and the NASDAQ is actually up for the year, diminishing the opportunity to make up losses as a result of taking an early RMD pre-COVID-19.
Nonetheless, if you do not wish to take your RMD for 2020, reversing an RMD is an option. It’s best to speak with a financial advisor to see if keeping your distribution makes sense for you. If you have any questions about the RMD rules, please give us a call @ 800.472.0646.