As mentioned in the most recent issue of "Seasonal Musings", - the quarterly e-newsletter distributed by Five Seasons Financial Planning - the passing of the SECURE Act late last year permanently changed the financial planning landscape, and in particular, many of the rules on required distributions from IRA's and retirement plan accounts. The Coronavirus Aid, Relief and Economic Security (CARES) Act, passed just a few months later, contains a number of measures related to the taking of RMD's in this calendar year alone.
First and foremost, all 2020 required minimum distributions have been waived. This provision includes RMD's from IRA's, from retirement plan accounts (like 401k's, 403b's and 457's), as well as from both traditional and Roth inherited IRA accounts. The waiver also applies to owners of tax-qualified accounts who waited until 2020 to take advantage of the 3-month grace period on their inaugural RMD's for 2019.
It's important to note that the CARES Act results in a permanent avoidance of required distributions for 2020, as well as the deferral of any related tax bills, and not simply a postponement of them until next year. The Act was signed into law on March 27, near the very lows of this year's stock market crash, and was intended at the time to keep retirees from having to take outsized distributions from depressed account values. (A similar law was enacted for 2009 RMD's for the same reasons during the Great Recession). Ironically, many retirement accounts have now rebounded back to their 2019 year-end values on which the 2020 RMD calculation is based.
What if I've Already Taken My 2020 RMD and Wish I Hadn't?
A recent survey by MagnifyMoney found that 30% of all retirement account owners took distributions from these accounts during a tumultuous 2-month period earlier this year, but that 60% of these investors regret having done so. If you took an RMD earlier this year, either before the passing of the CARES Act or after, and now wish you hadn't, relief is available - but not for long.
Retirees and owners of inherited retirement accounts have the option to rollover any of these regrettable 2020 RMD's until the end of this month, and in the process, to defer any of the tax consequences that would otherwise result from these distributions. Unlike other rollovers from tax-qualified accounts, there is no 60-day deadline associated with these rollovers of RMD's, simply that the funds must be replaced by August 31 regardless of when the funds were distributed in 2020. And usually there is only one 60-day rollover permitted in any one-year period, but these RMD rollovers will not count for that purpose.
The funds distributed don't even have to be returned to the same tax-qualified account. For example, a required minimum distribution from an IRA may be returned to the same account, to a different IRA account, or even to a retirement plan account if the plan sponsor allows it. However, any taxes that were withheld from the original RMD can't be reversed, although they will of course count as payments made when filing your 2020 tax return.
Should I Rollover My 2020 RMD?
Just because you are permitted to rollover the RMD you took earlier this year, doesn't mean you should, even if you can afford to do without this unneeded required minimum distribution as a source of cash flow to meet retirement expenses. Depending on your income situation this year and on your income projections for future years, and depending on your outlook for tax rates going forward, this may instead be a relatively opportune year in which to take taxable distributions from retirement accounts.
About the Author
Paul Winter, MBA, CFA, CFP® is a Fee-Only financial advisor and fiduciary in Salt Lake City, UT. His independent wealth management firm, Five Seasons Financial Planning, provides professional portfolio management and objective financial planning services to individuals and families, and to their related entities including trusts, estates, charitable organizations, and small businesses.