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

Planning to Sell Your Home in Retirement? Downsize Costs Along With Space
Budgeting

Planning to Sell Your Home in Retirement? Downsize Costs Along With Space

In this hot real estate market, consider the costs of buying and selling a house along with the expenses associated with your new digs.
November 13, 2020
What Biden Will Do: 24 Policy Plays to Expect From the Next Administration
Politics

What Biden Will Do: 24 Policy Plays to Expect From the Next Administration

The Kiplinger Letter forecasts President-Elect Joe Biden’s biggest priorities -- and the likelihood of progress on them.
November 19, 2020
The 13 Best Healthcare Stocks to Buy for 2021
Kiplinger's Investing Outlook

The 13 Best Healthcare Stocks to Buy for 2021

Most of the best healthcare stocks for 2021 will have some sort of ties to COVID, whether it's producing a vaccine or cure, or benefiting from the vir…
November 20, 2020

Recommended

The Best T. Rowe Price Funds for 401(k) Retirement Savers
Kiplinger's Investing Outlook

The Best T. Rowe Price Funds for 401(k) Retirement Savers

A dozen T. Rowe Price mutual funds also have a place among the nation's most popular 401(k) retirement products. Find out which funds belong in your r…
November 27, 2020
The Best Fidelity Funds for 401(k) Retirement Savers
Investing for Income

The Best Fidelity Funds for 401(k) Retirement Savers

Fidelity funds are renowned for their managers' stock-picking prowess. We rate Fidelity's best actively managed funds that are popular in 401(k) plans…
November 27, 2020
The Best Vanguard Funds for 401(k) Retirement Savers
mutual funds

The Best Vanguard Funds for 401(k) Retirement Savers

Vanguard funds account for a third of the 100 most popular 401(k) retirement products. We rank Vanguard's best actively managed funds, including its t…
November 27, 2020
The Best American Funds for 401(k) Retirement Savers
mutual funds

The Best American Funds for 401(k) Retirement Savers

American Funds has 14 actively managed mutual funds among the 100 most popular 401(k) offerings. We look at the Best American Funds in that group, and…
November 27, 2020