You have until August 31 to roll the funds back into your retirement account. Should you?

The CARES Act passed in March suspends, for 2020, the requirement that individuals take required minimum distributions (RMDs) from their IRAs or other qualified plans. The requirement to take annual distributions applies to individuals1 who were 70 ½ or older in 2019 or age 72 beginning January 1, 2020. Individuals, other than some spouses under the age requirement, who are beneficiaries of an IRA from a decedent may also be subject to the RMD provisions.

Under recent guidance provided by the IRS in Notice 2020-51, individuals who have taken an RMD in 2020 are allowed to put the money back into their IRA or other qualified plan2 if the funds are recontributed prior to August 31, 2020. Pre-existing rules allowed for most distributions to be rolled back into an IRA or other plan within 60 days of the distribution3. In addition, individuals were limited to one rollover distribution every 12 months. With respect to 2020 RMDs, under relief granted in Notice 2020-51, the rollover deadline for 2020 RMDs is extended to August 31, 2020 and any 2020 RMDs recontributed by the deadline are not counted as rollovers for purposes of the one rollover per 12-month period rule. 

For those individuals who do not need the cash from their retirement, Notice 2020-51 allows them to return unwanted RMDs and thereby avoiding having to pay tax on the distributions.

Given the RMD flexibility available for 2020, what are some considerations that might impact the decision to recontribute an unneeded distribution?

  • If I am not taking a full distribution in 2020 requires taking a 2021 distribution in excess of the RMD, will the 2021 tax on the excess be greater than the 2020 tax?
    • Bunching income into 2021 could result in falling into a higher tax bracket or result in higher Medicare premiums.
  • If I (and my spouse) intended to leave the IRA for the children, will their tax on distributions be greater than the tax I would pay on the distributions?
    • Note the SECURE Act passed in 2019 requires most non-spouse beneficiaries take distributions within 10 years of the account owner’s death.
  • Should I be making qualified charitable distributions (QCDs)?
    • QCDs have become an effective tool for those over age 70 ½ to make charitable contributions. With the increase in the standard deduction and new limitations in itemized deductions, many older individuals may receive little or no benefit from traditional cash charitable contributions. With a QCD, instead of writing a check to your charity, those over 70 ½ can have their IRA distribute funds directly to the charity4. The IRA distribution to the charity is not taxable to the account owner and a charitable deduction is not allowed. Even with the suspension of RMDs for 2020, QCDs may be advisable in certain situations if the charitable giving cannot be deferred until 2021.

The Deadline for Rolling Your QMD Back Is August 31. Act Now to Ensure You Take the Optimal Distributions for Your Needs.

The professionals in BPM’s Private Client Services practice are ready to help clients make informed decisions about their hard-earned money. With a body of seasoned tax professionals who utilize all the tools available to increase your tax savings, we are fully equipped to ensure you get the most out of your retirement accounts. And for individuals with philanthropic desires, we integrate charitable gifts into your overall estate, gift and trust plans in the tax-efficient manner possible. To learn about how BPM’s Private Client Services practice can help you make the optimal decision regarding your QMDs this year, contact our tax team.

1. Some 401(k) account owners may be eligible to delay withdrawals until retirement.
2. The suspension of the RMD for 2020 does not apply to defined benefit plans.
3. Under special rules for 2020, if the end of the 60-day period fell between February 1 and May 15, the recontribution deadline was extended to July 15.
4. Donor advised funds, private non-operating foundations and supporting organizations are not eligible to receive QCDs. 

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