Don't Take Those RMDs This Year!

Don’t Take Those RMDs This Year!

As you may have heard, the CARES Act (aka the Coronavirus stimulus bill) created a holiday for mandatory distributions from retirement accounts in 2020.

So if you’re otherwise required to pull money from your IRA or 401(k) this year, you can skip it – penalty free.  This includes retirement accounts of your own AND those inherited from someone else.  Pretty neat, right?

But remember, the CARES Act wasn’t passed until March.  What if you’ve already taken a distribution?  Can you put it back?

The good news is yes, you can, as long as it’s done by August 31st.  Whereas this wasn’t initially the allowable, updated guidance from the IRS says that those of you who took RMDs in January or February can now replace them.

Read on for the details on how to put back your RMD if you’ve already taken one, and when you might still want to take a distribution if you haven’t already.


The 60-Day Rollover Loophole

Let’s say that you’re a forward thinking investor, and prefer to take your mandatory distributions in February every year.  The paperwork is a nuisance, you don’t want a last minute scramble in December, and checking the box from your annual to-do list just feels more comfortable.  So this year, like most others, you took your mandatory distribution in February.

If you have enough cash flow & don’t necessarily need the funds, you might be a little miffed about the initial language in the CARES Act.  Investors who hadn’t taken their RMDs yet would now get to skip them for the year.  But since you already took yours in February, you missed out on that opportunity.

Fortunately for you, there was a loophole: the preexisting retirement account rollover rules.

Rollovers between different retirement accounts come in a couple different forms.  The first is a trustee to trustee transfer, where the funds in your account are sent directly from one custodian to another.

For example, you may have just retired from a job that offered a 401k.  Let’s say that 401k plan was held at Fidelity.  Now that you’re no longer working, you’d like to roll the balances in the old 401k plan to an IRA at Charles Schwab.  A trustee to trustee transfer is one where Fidelity cuts a check directly to Schwab.  They may mail the check to your home address, but it’s made out to Charles Schwab, with your account number in the memo.  The funds never hit your bank account.

The second type of rollover is known as a “60-day rollover”.  Whereas trustee to trustee transfers never hit your bank account, 60-day rollovers do.  The rule here is that the moment the funds from a retirement account are deposited in a non-retirement account, a 60-day clock starts ticking.

If you successfully deposit the funds into another retirement account within that 60-day window, it will qualify as an eligible rollover.  That’s good – as it is not considered a taxable event.  If you don’t get the funds into an eligible retirement account within 60-days it becomes a taxable event.  (That’s not so good).

The catch is that you’re only afforded one 60-day rollover every 365 days.  Meaning, you can’t take one 60-day rollover in November of year 1, and another in January of year 2.  They must be at least 365 days apart.

With regard to the CARES Act, the 60-day rollover becomes a pretty neat opportunity.  Those of us who may have taken mandatory distributions in February would still have been within the 60-day window when the CARES act was passed in March.  Meaning that unwanted RMDs from February could be put back into your IRA or 401(k) in April, saving you income tax on the distribution.


IRS Notices 2020-23 & 2020-51

Obviously, April is now behind us.  And while the 60-day rollover appeared to be a convenient opportunity, it didn’t do much for anyone who took their RMD in January, as they’d like already be outside the 60-day window by the time the CARES Act was passed.

Then, on April 9th, the IRS released notice 2020-23.  Rather than holding investors to the initial 60-day window, the IRS announced that it’d extend the rollover deadline to July 15th.  While this announcement didn’t help anyone who took investors who took distributions in January, it gave those to took distributions in February and later more time to replace them.

Then came notice 2020-51, on June 25th.  In this round the IRS again extended the deadline, from July 15th to August 31st.  But they also eliminated the February 1st cutoff, making “rollover replacement” an option for anyone who’s taken a distribution in 2020.  This means that it no longer matters when you took your distribution(s).  For tax year 2020, you may replace any unwanted RMDs – as long as the funds are back into your account by August 31st.

On top of the extended timeline, the “once per year” limitation has been lifted for 2020, pursuant to distributions that would otherwise have been RMDs.  For investors, this means that if you have a monthly distribution from your IRA set up to satisfy your RMD by the end of December, you won’t run afoul of the once per year limitation by replacing that entire stream of distributions between January and July.  It doesn’t negate the rule, though.  You are still limited to one 60-day rollover per year for distributions that wouldn’t be RMDs in the first place.


When You Might Still Want to Take an RMD

If you’re of the age where you’re required to pull money from your account each year, this creates a very helpful opportunity.  Not everyone wants to take funds from their accounts if they don’t have to, since retirement distributions come with a tax bill attached.  So you might want to think hard about replacing your RMD in order to avoid the tax this year.

That doesn’t mean everyone should do it, though.  If you’re someone who’s tight on cash right now you may want to hang on to the distribution – especially if you had taxes withheld.

Picture this: if you’re having 25% of your distributions withheld for taxes, you’ll only be receiving $750 for every $1000 of distributions.  Each time you take $1000 out of your account, your broker would send you $750 and keep the other $250.  Soon afterward, they’d turn around and send the $250 withholding to the IRS (and perhaps your state revenue authority).

To replace the distribution, you’d need to re-deposit the full $1000, after only receiving $750 in the first place.  Even though you’ll get the extra $250 back come tax time next year, it could create a cash crunch over the next 6-9 months.

Now is not a time I’d want to be short on cash.


Does the IRS Even Have Authority?

I should also mention that the two notices mentioned above bring forth an interesting legal predicament for the IRS, too.  The IRS has claimed for years that it doesn’t have the authority to grant relief toward the once per year rollover limitation.  There are numerous Private Letter Rulings in circulation where the IRS explicitly says that there are no legal mechanisms for them to relax the rule.  (Even though they can give extensions on the 60-day window).

This position is congruent with the first notice (2020-23) from April.  But the second notice released in June (2020-51) tosses that position out the window.  While it seems like they’ve reached a fair outcome by allowing monthly RMDs to be replaced, it sets an interesting precedent.

How far could the IRS go in the future?  They’ve clearly overstepped their legal bounds here, according to people smarter than me.  Do the ends justify the means?  I doubt anyone will argue that a retiree taking 1/12 of their RMD from an IRA each month should be allowed to put it back.  But what happens next time?  The line of scrimmage has moved.


Aside from the legal discussion about the IRS’ jurisdiction, this is a good thing for investors.  Just make sure to have your deposits in by August 31st if you’d like to take advantage of it.

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