Section 2203 of the CARES Act grants a waiver of the required minimum distribution (RMD) for 2020 from certain defined contribution plans and individual retirement accounts (IRAs). That’s great news for most RMD eligible people, since keeping funds in your tax-deferred retirement account will keep these funds from being taxed for another year. But what if you have already taken your RMD, and you don’t need the money? Are you being penalized for taking your RMD early? Not necessarily.
Fortunately, if you have already taken your RMD, there are two potential measures you can consider for getting the funds back in the account. The first is an existing rule that allows 60 days for an indirect rollover of all or a portion of the assets in a qualified retirement account. That means you can put money back in the IRA or other qualified retirement account if 60 days or fewer have passed since you took the distribution. Since this is an existing rule, we recommend taking advantage of the rollover rule, assuming you don’t otherwise need the money. We are not yet clear if cash is the only acceptable asset that can be “recontributed.” So, if you took the distribution in stock or have already spent or invested the cash from your RMD, you may not be able to recontribute stock or other securities. You may have to liquidate assets to contribute cash.
We have learned through our custodian relationships, that the distribution cannot be reversed, meaning that any tax-withholding applied to the distribution would have been sent to the IRS or state tax authority. However, it is our opinion that you can roll the full distribution back into the account. Presumably, depending on other factors related to your 2020 income, you could receive the money withheld back as a refund when you file your 2020 tax return. For example, if your 2020 RMD was $50,000, and you had $10,000 (or 20%) withheld for federal taxes, receiving $40,000 net to your bank account, you could put the full $50,000 back into the IRA (assuming you had the cash available to do so) and the $10,000 withheld should be refunded on your 2020 tax return.
If you were really on top of things and took your RMD more than 60 days ago, the indirect rollover rule won’t help you; however, the new CARES Act may provide a workaround, for at least a portion of the money. The new law allows for distributions of up to $100,000, to be classified as, “coronavirus-related distributions,” which can be repaid to your retirement plan account anytime during the three-year period beginning on the day after the date on which such distribution was received. The key is that the effective date of these distributions is retroactive to Jan. 1, 2020. Therefore, if you took a $100,000 RMD on January 2, you could potentially still get the money back into your retirement account if you classified it as a coronavirus-related distribution.
This opportunity is based on our interpretation of the law at this time. We are still awaiting further guidance from the IRS before recommending definitive action regarding coronavirus-related distributions. We will be carefully monitoring the developments on this and will report additional details as we have them.
Inherited IRAs are generally not eligible for the 60-day indirect rollover, but we believe, based on our interpretation of the law, that you could classify an RMD previously withdrawn from an inherited IRA as a coronavirus-related distribution up to $100,000, and recontribute the funds in this manner.
As always, each situation is unique. If you have questions or need assistance, contact the Experts at Henssler Financial:
- Experts Request Form
- Email: email@example.com
- Phone: 770-429-9166
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