The CARES Act and Required Minimum Distributions
By James I. Moore, CFP®
In response to the economic uncertainty surrounding the Coronavirus pandemic, Congress passed the Coronavirus Aid, Relief, and Economic Security Act, also known as the CARES Act, on March 27, 2020. Among the numerous provisions was the suspension of Required Minimum Distributions (RMDs) for 2020.
However, since the bill was not passed until the end of March, many individuals had already taken their RMDs for 2020. Unfortunately, the CARES Act did not provide a mechanism to “undo” these distributions.
Some individuals were able to put their RMD back into their retirement account by doing a 60-day rollover. But many other people appeared to be out of luck. For those more “proactive” individuals who took distributions early in January, the 60-day window had already passed. For those who had already done a rollover within the last 365 days, the once-per-year rollover rule prevented them from doing another one. For those who took their RMD from an inherited IRA, existing law specifically disallowed rollovers for inherited accounts.
In an attempt to fix these issues, the IRS issued Notice 2020-51 in June. The notice stated that for RMDs already taken in 2020, the IRS will extend the 60-day rollover period to August 31st. In addition, the notice stated these RMD rollovers will not be subject to the normal once-per-year rule or the restriction on rollovers for inherited IRAs. Basically, anyone who took an RMD in 2020 now has the chance to roll the money back into their retirement account by August 31st.
It is important to note that you are only allowed to roll over an amount up to what your actual RMD would have been for 2020. If you took a distribution in excess of your RMD, then that excess amount is unable to be rolled over.
Does it make sense for you to return your RMD?
If you already took your RMD earlier this year, you may be asking yourself if it makes sense to return it by August 31st. Or maybe you have not taken your RMD yet and are wondering if you will benefit from skipping the distribution this year.
The answer will depend on your specific situation, but generally, if you don’t need the money or can choose to take money from another source, it will probably make sense for you to forgo the RMD this year. By skipping the distribution, you will lower your tax bill and allow your retirement account to grow tax-deferred for an additional year. However, if your tax rate will be relatively low this year, it may make sense for you to take your RMD as you normally would have.
Does it still make sense to make qualified charitable distributions (QCDs) from your IRA?
Even though Congress eliminated RMDs for the year, qualified charitable distributions (QCDs) are still allowed. For individuals planning to make charitable gifts in 2020, doing a QCD may still be an effective way to make those gifts, especially for those who are not able to itemize their deductions.
Make sure to act before August 31st
Because of the recent notice from the IRS regarding RMDs, many individuals now have new options available to them compared with just a month ago, but the August 31st deadline is approaching quickly. If you have specific questions about the CARES Act and how the new rules affect you, our Fullerton financial advisory firm is happy to talk through your situation. Schedule a 15-minute discovery call with a fee-only financial advisor.