A lot has happened since our last tax planning update. States have implemented their own strategies for re-opening, new areas have been impacted by the virus, and it’s rare if you don’t see someone wearing a mask while out and about. With all the uncertainty regarding the virus, we want to ensure that you are well informed from a tax planning standpoint. The following update is mainly directed toward individuals that took all or part of their required minimum distribution for 2020 but wish to roll funds back into their IRA.
Unwanted RMDs taken in 2020 can be rolled back into IRAs until August 31, 2020. (Notice 2020-51)
During a “normal” year, an individual who has reached required minimum distribution (RMD) age (72 as of January 2020), must annually distribute a certain calculated amount from their pre-tax retirement accounts. As a refresher, on March 27th, 2020, the CARES Act was passed, which under Section 2203, waived the required minimum distribution rule for most retirement accounts for 2020. The idea behind the 2020 RMD waiver was to avoid forcing RMD-aged individuals to liquidate their retirement assets at relatively depressed market valuations. For individuals that do not need the money for living expenses in 2020, it provides the opportunity to keep the funds invested in their retirement accounts.
The CARES Act was passed almost a quarter of the way through the year, which caused issues for people who had already distributed amounts they originally thought were required. People who had already taken their RMDs for the year were stuck. Then, on April 9, 2020, the IRS came out with Notice 2020-23 which provided the ability to roll some (but not all) of the unwanted, already-distributed RMDs back into the retirement account. Although helpful, there were several scenarios where certain individuals still could not roll those distributions back into their retirement accounts.
On June 23rd, 2020, the IRS released Notice 2020-51 as new guidance regarding the waiver of 2020 required minimum distributions (RMDs). This additional information was designed to provide even more support for individuals that had already taken all or a partial amount of what they thought was required to distribute for 2020, before the CARES Act waived the requirement. Specifically, the IRS expanded the deadline to roll RMDs back into IRAs until the later of August 31, 2020, or 60 days after the receipt of the distribution. This update also expanded the restrictions of the previous notice (Notice 2020-23), specifying that any RMDs taken from January 1, 2020 (previously only up to February 1, 2020) were now eligible to be rolled back into the individual’s IRA. Notice 2020-51 also allowed individuals to ignore the once-per-year rollover rule. This means that individuals who took more than one distribution, such as monthly distributions, can now do one aggregate rollover for the total amount distributed. Lastly, Notice 2020-51 also allows owners of inherited IRAs the opportunity to roll unwanted RMDs back into their inherited IRAs. Although the updates provided within Notice 2020-51 clearly show the IRS attempting to be fair to taxpayers, many tax professionals are pointing out that this latest notice stretched their legal authority.
In other coronavirus-related news, President Trump recently signed four executive actions to provide additional unemployment benefits, adjustments to the collection of payroll taxes, extra support for renters and homeowners, and extensions to the coronavirus-related assistance for federal student loans. We will continue to monitor for additional details regarding the executive actions, Section 2203 of the CARES Act, and any other changes that may impact you. If you have any questions regarding retirement planning or would like to discuss whether this information is applicable to you, please give our office a call at (757) 436-1122.