Making Your Money Last

Retirees Get Another Break with Expansion of RMD Waiver

The CARES Act cancelled "required minimum distributions" for 2020...and the IRS just expanded that relief to help more seniors and give more time to undo previous withdrawals.

Seniors got a big break back in March when the Coronavirus Aid, Relief, and Economic Security (CARES) Act nixed required minimum distributions (RMDs) for 2020. But some retirees who took money out of a retirement account before enactment of the CARES Act were stuck and unable to take advantage of the RMD waiver. That's all changed now, though. The IRS issued new guidance expanding the waiver relief and giving retirees more time to undo pre-CARES Act withdrawals.

RMD Waivers for 2020

Generally, once you turn 72 (70½ before 2020), you have to take a certain amount of money out of your traditional IRAs and 401(k) plans each year. These mandatory retirement account withdrawals are called "required minimum distributions" (or RMDs for short).

A lot of retirees complain each year about being forced to take RMDs. However, there was even more concern about them this year because of the economic mess we're in right now. Requiring distributions in 2020 would have essentially forced retirees to "sell low" by pulling money out of their retirement account when the stock market is down significantly. So, under the CARES Act, RMDs are waived for 2020. This gives retirees some breathing room and lets them keep money in their retirement accounts a little longer to (hopefully) recover the lost value.

But what about the early birds who already took their RMD for 2020 before the CARES Act was enacted? If you took an RMD this year between February 1 and May 15, you had until July 15, 2020, to put the money back into an IRA and avoid paying tax on the withdrawn amount. If you took an RMD in January, though, you were out of luck – until now.

Any 2020 RMD Can be Undone

The IRS now says that anyone who took an RMD from an IRA or 401(k) plan in 2020 can repay the withdrawn funds – even if the withdrawal was in January. The repayment will be treated as a tax-free rollover, but it isn't subject to the "one-rollover-every-12-months" rule. Tax-free rollovers are also now available for 2020 RMDs taken by beneficiaries of inherited IRAs. Before the new IRS guidance, inherited IRAs weren't included in the relief measures.

However, these repayment rollovers are limited to the amount that would have been required as an RMD if the CARES Act had not waived RMDs for the year. Rollovers aren't available for 2020 distributions from a traditional pension (i.e., a "defined-benefit plan"), either.

Rollovers Must Be Completed by August 31

The IRS also extended the rollover deadline for RMDs already taken this year (normally, rollovers must be completed within 60 days). The original due date for rollovers was July 15, 2020, for RMDs taken between February 1 and May 15. Now, retirees who took an RMD between January 1 and June 30 have until August 31, 2020, to repay the distributed funds. That gives everyone a little more time to put the money back into an IRA or 401(k) plan to avoid paying tax on a previous 2020 distribution.

Benefits of Repaying 2020 RMDs

If you need the money, by all means keep any 2020 retirement plan distributions that you already took. However, if you can pay all your bills without that money, putting it back into a retirement account can save you in many ways. In addition to allowing the money to grow for a longer period of time, you'll also have less taxable income for 2020. That can translate into less tax on your Social Security benefits, lower Medicare premiums, or a "recovery rebate" credit on your 2020 tax return. It can also make it easier to convert a traditional IRA into a Roth IRA if that makes sense for you.

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