Late last week, the IRS released a notice about tax filing deadline extensions and postponements.
Included in the notice were provisions offering relief for individuals who take Required Minimum Distributions (RMDs) from retirement accounts.
Understanding these rules can help you take advantage of opportunities and avoid missteps. Here are some answers to common questions that will shed light on things.
How does the notice affect RMDs?
On March 27, Congress passed the CARES Act, which suspended all RMDs from retirement accounts for 2020.
Prior to the Act, some individuals had already taken RMDs for 2020. In many cases, the notice allows these people to put the distributions back, allowing for more tax-deferred savings.
Who qualifies for this relief?
Normally, if you take a distribution from your IRA, you have 60 days from receipt of the distribution to put the money back.
The recent IRS notice extends this 60-day rule. Individuals who took a now unwanted RMD between February 1 and May 15 have until July 15 to put the money back.
However, for people who take monthly RMDs from an IRA, the once-per-365-day IRA rollover rule still applies. In this case, only one monthly distribution qualifies for the extension.
What if I took my RMD in January and want to put it back?
As of today, individuals who took an RMD in January 2020 are out of luck. The IRS has not yet come out with specific 60-day and once-per-year rule relief that would allow rollback of all RMDs taken in 2020.
What about inherited IRAs?
Under the CARES Act, beneficiaries are not required to take an RMD in 2020.
Non-spouse beneficiaries who have already taken an RMD cannot put it back because they do not qualify for the 60-day extension.
What happens to my tax withholdings if I return an unwanted RMD?
Federal or state taxes already withheld cannot be reversed.
A few options are available. You can:
- Return the gross amount of the RMD by paying the tax withholding out of pocket
- Reduce future estimated tax payments
- Wait for a refund on your 2020 tax return
If you have taken RMDs for income needs in the past, you might withdraw funds from your taxable portfolio (where possible) to minimize taxes. This is because RMDs are taxed at higher ordinary income rates, whereas taxable accounts are taxed at lower capital gains rates.
How does the RMD suspension impact charitable giving?
Individuals age 70.5 and older can still make Qualified Charitable Distributions (QCDs) of up to $100,000 from an IRA.
This direct distribution to a qualified charity would not be taxable income, and it would not offset any RMDs for 2020, since they are suspended.
Need additional guidance?
To make the most of the new provisions for RMDs in 2020, contact Vista. We’re glad to help.