Congress often gets chided (and justifiably so) for moving at the speed of a glacier, but there are times when they do act with deliberate speed. The CARES Act was one of those times.
They acted quickly to pass legislation that increased the size of loans that participants can take from retirement plans (from a maximum of $50,000 to as much as $100,000), while at the same time extending the time they have to pay those loans back. Also, most retirement plans do not allow active participants to request distributions from their accounts. To receive a distribution from your retirement plan, the IRS requires what is known as a “distributable event.” That generally means that you have separated from service. Here again, within the CARES Act, anticipating the layoffs precipitated by COVID-19 and employees’ needs for access to cash, Congress allowed for what are known as in-service distributions of up to $100,000. In terms of recognizing it as taxable income, the CARES Act allows the distribution to be taxed ratably over three years (2020, 2021 and 2022).
The most significant changes may have been the modifications made to 2020 RMDs. For purposes of this article, I am referring to RMDs taken only from defined contribution plans (IRAs, 401(k)s, Profit-Sharing Plans, 403(b)s, SEP IRAs and SIMPLE IRAs). These changes do not apply to RMDs that need to be taken from defined benefit plans or cash balance plans. Those plans have their own separate RMD rules.
As far as changing the 2020 RMDs rules, Congress revisited a model that they created in 2009 during the great recession, which the IRS then took one step further. An RMD is typically calculated by taking the account balance on December 31st of the previous year and dividing it by a life expectancy factor provided by the IRS. The S&P was up 28.9% in 2019 and, as the saying goes, a rising tide lifts all boats, so most account balances were up as well. When the Coronavirus first hit us, the stock market plunged dramatically. No one anticipated the stock market would bounce back the way that it did. Without that bounce back, participants would have been forced to take a larger distribution from a smaller pool of assets. Congress is prescribing virtually the same treatment that they used in 2009. To remedy this, the CARES Act waived RMDs (including inherited IRAs) for 2020, though certain complicating factors led to unanswered questions. Allow me to answer those for you:
Q – The SECURE Act, effective as of 01/01/2020, raised the age that an individual must begin taking RMDs from 70 ½ to 72. I turned 72 in 2020, which means my required beginning date would be April 1, 2021. Do I have to take my RMD by that date?
A – No, the 2020 RMD is waived for an individual whose required beginning date is April 1, 2021. But you will need to take the 2021 RMD before December 31, 2021.
Q – I took my 2020 RMD in January. I would roll it back in if I could. Can I do that?
A – IRS Notice 2020-51 extends the 60-day rollover deadline for 2020 RMDs to August 31, 2020.
Q – I am the beneficiary of an inherited IRA. Do I get a pass on taking the 2020 RMD? What if I already took my RMD in January?
A – Yes, the IRA repayment opportunity is available with treatment as a rollover to beneficiaries of inherited IRAs. If the RMD was taken in January, you have until August 31, 2020 to roll it back in.
Q – I took a larger distribution than was required as my RMD. Can I roll that back in?
A – You can roll back the exact amount of the RMD. Any distribution above that amount cannot be rolled back in and will be a 2020 taxable distribution.
Q – I have heard that I can only do one rollover per year. I took my RMD in January and would roll it back in if I could, but this would be my second rollover for this year. Can I still roll my RMD back where it came from?
A – The IRS Notice waives the “one-rollover-per-year” limitation as long as two conditions are met: 1) the distribution must have been one that would have been treated as an RMD in 2020, but for the CARES Act waiver, and 2) the distribution must be repaid to the distributing IRA or retirement plan by August 31, 2020.
Q – I took a regular distribution (not an RMD) from my IRA in 2020. I would roll that back in if I could. Can I do that?
A – No, it is only RMDs that can be rolled back into the distributing IRA or retirement plan.
So an opportunity does exist to re-characterize a 2020 RMD as a rollover. The RMD however, must be rolled back into the distributing IRA or plan by August 31, 2020. The clock is ticking.
Based upon information from a June 24th article from Dana Fried, JD, LLM, LP of Cohn Reznick, an August 1st article in Forbes by Bob Carlson and an August 2nd article from Business Insider