Advertisement
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.

Advertisement - Article continues below

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.

Advertisement
Advertisement

Most Popular

11 Dividend-Paying Stocks You Should Think Twice About
dividend stocks

11 Dividend-Paying Stocks You Should Think Twice About

Dividend-paying stocks often can be a store of safety, but 2020 has been difficult on income equities. These 11 picks look like shaky plays despite th…
September 21, 2020
Medicare Basics: 11 Things You Need to Know
Medicare

Medicare Basics: 11 Things You Need to Know

There's Medicare Part A, Part B, Part D, medigap plans, Medicare Advantage plans and so on. We sort out the confusion about signing up for Medicare --…
September 16, 2020
Where You Should Invest Now
investing

Where You Should Invest Now

Kiplinger.com senior investing editor Kyle Woodley joins our Your Money's Worth podcast to answer investor questions about tech stocks, the election a…
September 22, 2020

Recommended

How To Buy a Roth IRA When You Make Too Much To Qualify For One
Roth IRAs

How To Buy a Roth IRA When You Make Too Much To Qualify For One

With their tax-free growth and tax-free withdrawals, Roth IRAs are a great deal — if you qualify. If you don’t, well, there’s still a way to get into …
September 23, 2020
The Annuity With a Tax-Planning Twist
Financial Planning

The Annuity With a Tax-Planning Twist

A qualified life annuity contract helps retirees with guaranteed payments to last their entire lives.
September 21, 2020
HSA Limits and Minimums
health savings accounts

HSA Limits and Minimums

Annually adjusted contribution limits and other requirements must be met if you're covering health care costs with a Health Savings Account.
September 21, 2020
Don’t Be Paralyzed by Uncertainty
retirement planning

Don’t Be Paralyzed by Uncertainty

You definitely need a plan, because what’s ahead could be scarier than what’s behind us.
September 21, 2020