IRS Eases 2020 Retirement Account Distribution Rules…Again!
Steven E. Warren, CPA, MBT practices accounting and consulting at Schechter Dokken Kanter CPAs, a Minneapolis CPA and consulting firm. Mr. Warren can be contacted at firstname.lastname@example.org or 612-332-9391.
Do you have any 2020 taxable retirement account distributions you’d like to put back and make nontaxable? You probably can. The CARES Act eased distribution rules when it became law March 27, 2020. The IRS has twice since eased the rules further. The latest IRS guidance allows taxpayers to put 2020 distributions back in the same account through August 31 to the extent the distribution would have been a required minimum distribution (RMD) had RMDs not been waived for 2020.
First - CARES Act Eliminates 2020 RMD
The CARES Act waived all RMDs for 2020 for defined contribution plans (such as 401(k), 403(b) and profit sharing plans) and IRAs including inherited accounts. The relief also applies to taxpayers who turned age 70½ in 2019 and opted to defer to 2020 their first required distribution to be received by April 1, 2020.
If you took a distribution from a non-inherited account within 60 days, the distribution could be rolled over tax-free back into the same account or another qualifying account under existing rollover rules at the time. Existing rules limited the use of this strategy to one rollover per 12-month period. Inherited IRAs could not be rolled over under the rules at the time.
Then - IRS Expands Rollover Period to July 15
On April 9, the IRS expanded the relief by increasing the 60-day period with an extension of the rollover deadline to July 15, 2020. The relief from this notice was only available when the end of the 60-day period fell between April 1, 2020, and July 14, 2020. Taxpayers who took distributions in January were not eligible for the relief on their January distributions because their 60-day window had closed.
Now - Make that August 31 and Include All 2020 “RMDs” While You’re At It
The IRS announced on June 23, 2020, further expansion of its distribution relief. The new notice allows tax-free rollovers of certain 2020 defined contribution plan distributions and IRA distributions when rolled back into the same account by August 31, 2020, regardless of when in 2020 the distributions occurred. The treatment is only allowed to the extent the distribution would have been a required minimum distribution had RMDs not been waived for the year.
The notice further expands the put-back option by:
- Including distributions from inherited IRAs
- Including distributions of individuals with a required beginning date of April 1, 2021, who can take their first distribution in 2020
- Eliminating the one rollover per 12-month rule for 2020 distributions
Defined contribution plans must be amended to allow the funds to be rolled back in. IRS Notice 2020-51 includes sample amendments. IRAs are eligible without the need for an amendment.
Should You Roll the Distribution Back?
Putting the distributions back in your account is a good strategy for many that can reduce your 2020 tax liability and your 2020 estimated taxes and may even reduce 2021 estimated tax payments when using a safe harbor approach to avoid interest and penalties. For others, it makes more sense to pay the tax on the distributions with tax year 2020 income when the tax cost is expected to be substantially more on the same income later. Like with much about tax planning, there is no one-size-fits-all answer. I encourage you to discuss with your CPA or financial advisor what approach is best for your situation.
This article is being provided for informational purposes only. It is not intended to provide specific tax advice. For specific tax advice, the services of an accountant should be sought. Affiance Financial does not serve as an accountant and does not prepare tax returns. All information is believed to be from reliable sources. However, we make no representation as to its completeness or accuracy.