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Retirees Get a Break on IRA Distributions

The IRS is expected to come out with additional guidance, but here’s what we know so far.

The coronavirus stimulus package, known as the CARES Act, allows retirees who are 72 or older to skip required minimum distributions from IRAs and other tax-deferred accounts for 2020. Here are answers to questions about the waiver.

I took a required distribution from my IRA before the CARES Act was enacted. Can I put the money back into my account to avoid the tax bill? Ordinarily, you have 60 days to roll money withdrawn from an IRA back into the account. The IRS has extended the rollover deadline until July 15 for account holders who took an RMD between February 1 and May 15.

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The option isn’t available if you rolled over money from one IRA to another in the past 365 days, because the IRS only permits one rollover per year. The IRS guidance also excludes account owners who took an RMD in January. However, the IRS is expected to come out with additional guidance, and it may allow people who took distributions in January to put that money back, too, says Ed Slott, founder of IRAHelp.com.

Even if that doesn’t happen, there may be a workaround. The CARES Act allows IRA owners who were affected by the coronavirus pandemic to take a distribution of up to $100,000; if they repay the money within three years, the distribution won’t be taxed. If you can demonstrate that you needed the money to manage a coronavirus-related hardship, such as illness or unemployment, you may be able to put it back and avoid the tax bill.

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I turned 70½ in 2019 and delayed my first RMD until April 1. Does the waiver apply to that distribution? Yes. The SECURE Act, signed into law at the end of 2019, increased the age at which retirees are required to take RMDs from 70½ to 72 starting in 2020. People who turned 70½ in 2019 were originally required to take their first distribution by April 1, but because of the waiver, you can put it off until 2021.

Does the waiver apply to inherited IRAs? Yes. The SECURE Act technically eliminated RMDs for non-spouse beneficiaries of inherited IRAs, mandating instead that they must drain the account within 10 years after the original owner’s death. If you inherit an IRA this year, the waiver won’t affect that deadline. But if you inherited an IRA before 2020, you’re still subject to the old rules, which allow you to take RMDs based on your life expectancy. In that case, you can skip your distribution this year. If you’ve already taken a distribution from an inherited IRA, however, you can’t roll it back into the account.

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Because RMDs are waived this year, does that mean I can withdraw money from my IRA and convert it directly to a Roth? Yes. Ordinarily, you can’t convert money in your IRA to a Roth until after you’ve taken your RMD. That could trigger a bigger tax bill and potentially push you into a higher tax bracket. But with the RMD requirement waived this year, you can convert any amount of money to a Roth. You will still pay taxes based on the value of your IRA at the time of the conversion. If your portfolio has taken a beating, this could be an ideal time to convert. Once your investments are in a Roth, future gains will be tax-free.

With the RMD waived, does it still make sense to make a qualified charitable distribution this year? Once you reach 70½, you’re allowed to contribute up to $100,000 directly from your IRA to charity, and the contribution counts toward your RMD. That’s not an issue this year, but a qualified charitable distribution offers other benefits, says Mari Adam, a certified financial planner in Boca Raton, Fla. A QCD will reduce the size of your IRA, which means that future RMDs will be smaller, and your tax bill will be smaller, too.

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