On Tuesday, June 23, 2020, the IRS issued a notice clarifying the recent waiver of required minimum distributions (RMD) from retirement plans in 2020. Individuals who have already taken all or parts of their RMDs earlier this year can roll those funds back into their retirement accounts in order to reduce taxable income, but they must act fast.

The CARES Act created a number of programs designed to offer financial relief to Americans affected either directly or indirectly by Covid-19. Allowing the option to skip this year’s required distributions from retirement accounts allows individuals more control over their taxable income and could reduce their overall taxes paid for 2020. Currently, this applies to IRA owners, inherited IRA owners, as well as defined-contribution retirement plans such as 401(k)s, 403(b)s, etc. Note that defined-benefit pension plans do not receive this waiver.

Typically, IRA owners who have received a distribution only have a 60-day window to roll funds back into their accounts and avoid taxes. Individuals who took their RMD for 2020 out in January were essentially penalized by being beyond their 60 day rollover period and not able to participate in this waiver. However, with this recent guidance from the IRS, those who have already taken RMDs this year have an extended period to repay those funds, but they have to do so by August 31st, 2020.

It is important to note that the ability to roll distributions back into retirement accounts only applies up to the required minimum distribution amount. Any excess money is taken out above the RMD still has to abide by the 60-day rollover rule. In addition, rollovers are typically only allowed once every 12 months. However, the IRS has stated that these RMD rollovers should not count against that limitation.

This ruling on waiving and rolling over required minimum distributions in 2020 offers great planning opportunities. Keeping adjusted gross income under certain thresholds can potentially reduce the taxability of social security, avoid higher capital gains or net investment income tax, and increase the impact of some deductions. For some, this may also be an opportunity to convert some funds to a Roth IRA at a lower tax bracket and have that money grow tax-free going forward.

Again, the option to roll over a 2020 RMD is only available until August 31st, so it’s important to start planning.

Wondering what you should do?

Contact a PBMares advisor today to see how we can help.