Articles

RMDs Already Taken in 2020 Can Be Paid Back to Retirement Plans by Jeff Mutnik, CPA/PFS

Posted on July 07, 2020

One of the provisions included in the CARES Act to help U.S. taxpayers during the financial crisis precipitated by COVID-19 is a suspension of required minimum distributions (RMDs) from IRAs, 401(k) plans and 403(b) plans for 2020. Because this relief is retroactive to Jan. 1, 2020, the IRS announced it will allow taxpayers who took their 2020 RMDs before the enactment of the CARES Act on March 27, 2020, to now roll those funds back into their retirement accounts by Aug. 31, 2020, and waive their RMDs for the year.

This relief, which extends the normal 60-day rollover period taxpayers usually have to return distributions to retirement accounts, also applies to taxpayers who turned age 70½ in 2019 and would otherwise have had to take the first RMDs by April 1, 2020. In addition to giving taxpayers more time to pay back 2020 RMDs to their IRAs and other defined-contribution retirement plans, the IRS will not count these repayments for purposes of calculating the one rollover per 12-month period rule.  However, account owners should note there may be a requirement to adopt plan amendments before these rules can change. According to a list of questions and answers issued by the IRS, IRAs, in particular, do not have to be amended to reflect the RMD waiver for 2020.

Taxpayers should consider the flexibility of this rollover relief when reviewing their unique cash-flow needs against the tax ramifications of taking an RMD as income in 2020. With 2020 income expected to be reduced, this may be a good year for taxpayers to take their RMDs and even withdraw more than required. In addition, taxpayers with retirement savings in tax-deferred IRAs or 401(k)s may consider converting those plans to Roth IRAs and Roth 401(k)s and paying the resulting tax liabilities now in order to enjoy tax-free withdrawals in retirement. All these decisions should be made under the guidance of tax accountants and financial advisors to ensure both tax efficiency and compliance with ever-changing tax laws.

About the Author: Jeffrey M. Mutnik, CPA/PFS, is a director of Taxation and Financial Services with Berkowitz Pollack Brant Advisors + CPAs, where he provides tax- and estate-planning counsel to high-net-worth families, closely held businesses and professional services firms. He can be reached at the CPA firm’s Ft. Lauderdale, Fla., office at (954) 712-7000 or via email at info@bpbcpa.com.