Coronavirus and Your Money

Deadline for Returning RMDs to Retirement Accounts is Approaching Fast

Retirees who took a required minimum distribution earlier this year need to act quickly if they want to avoid taxes on the money they withdrew.

If you took money out of an IRA, 401(k) plan, or other retirement account in 2020 as a required minimum distribution (RMD), you have until August 31 to rollover or repay the distribution to avoid paying taxes on it.

RMDs Waived for 2020

The CARES Act waived all RMDs for 2020, including for seniors who turned age 70½ in 2019 and took their first RMD in 2020. (RMDs aren't required from Roth IRAs.) However, the CARES Act wasn't enacted until late March. As a result, some people took their RMD for 2020 before they knew they weren't going to be required for the year.

To help these people, the IRS is allowing them to return the money to their retirement account or other qualified plan. However, RMDs must be rolled over to another IRA, another qualified retirement plan (e.g., a 401(k) plan), or returned to the original plan by August 31, 2020.

The IRS is also waiving the one-rollover-per-12-month-period limitation and the restriction on rollovers to inherited IRAs for these repayments.

Taxation of Money That Isn't Rolled Over

If you miss the August 31 deadline, the money you took out of a traditional IRA, 401(k) plan, or other retirement account will be taxable income for 2020. That's true even if you originally intended the withdrawal to be an RMD.

So, if you want to avoid paying taxes on the money you took out as a RMD earlier this year, you don't have much time left to return the money to the account or roll it over into a different retirement account.

Is a Roth Conversion Right for You?

If you don't need the money that you withdrew earlier in the year and you can afford to pay the tax on it, consider putting the money in a Roth IRA. For one thing, the money will continue to grow tax-free in the Roth account. Plus, when you do need the funds down the road, you can take a tax-free distribution from the account (because you would have already paid tax on it this year).

This is a particularly good idea if you're tax rate is expected to be higher in the future. If that's the case, pay the tax now at a lower rate rather than later at a higher rate. There are some hidden costs of Roth IRA conversions, so they aren't for everyone.

Most Popular

Child Tax Credit 2021: Who Gets $3,600? Will I Get Monthly Payments? And Other FAQs
Coronavirus and Your Money

Child Tax Credit 2021: Who Gets $3,600? Will I Get Monthly Payments? And Other FAQs

People have lots of questions about the new $3,000 or $3,600 child tax credit and the advance payments that the IRS will send to most families in 2021…
May 4, 2021
Are You Still Chasing the Almighty Dollar, Even Though You Have Plenty to Retire?
retirement

Are You Still Chasing the Almighty Dollar, Even Though You Have Plenty to Retire?

In our experience, many have saved enough money to retire comfortably. Yet too many worry about their money running out and want more. Maybe it’s tim…
May 6, 2021
9 Tax Deadlines for May 17 (It's Not Just the Due Date for Your Tax Return)
tax deadline

9 Tax Deadlines for May 17 (It's Not Just the Due Date for Your Tax Return)

Between due dates for extension requests, IRA or HSA contributions, and other deadlines, there's more to do by May 17 than just filing your federal in…
May 4, 2021

Recommended

33 States with No Estate Taxes or Inheritance Taxes
retirement

33 States with No Estate Taxes or Inheritance Taxes

Even with the federal exemption from death taxes raised, retirees should pay more attention to estate taxes and inheritance taxes levied by states.
May 6, 2021
Taxes, Taxes and More Taxes
tax planning

Taxes, Taxes and More Taxes

In light of the recent proposals by President Biden and Sens. Bernie Sanders and Chris Van Hollen, here’s what could be coming and some ideas on how t…
May 4, 2021
9 Tax Deadlines for May 17 (It's Not Just the Due Date for Your Tax Return)
tax deadline

9 Tax Deadlines for May 17 (It's Not Just the Due Date for Your Tax Return)

Between due dates for extension requests, IRA or HSA contributions, and other deadlines, there's more to do by May 17 than just filing your federal in…
May 4, 2021
Why Today’s Retirees Need to Pursue Tax-Minimization Strategies
tax planning

Why Today’s Retirees Need to Pursue Tax-Minimization Strategies

IRAs are the name of the game for today’s retirees. While they come with helpful tax breaks for savers, pulling money out in retirement comes with maj…
May 4, 2021