What is the new Rollover guidance?
The IRS announced on Tuesday, June 23, 2020, via Notice 2020-51 (PDF), additional relief relating to Required Minimum Distributions (RMD), allowing you to return RMD funds withdrawn after January 1, 2020.
As it sits now, the CARES Act RMD waiver for 2020 is still in place, meaning that you are not required to take an RMD for 2020. This applies to defined-contribution plans such as 401(k) or 403(b) plans and IRA accounts. Those who have previously taken RMDs are likely familiar with the process; but for those who turned 70 ½ in 2019, this all may be brand new, and it’s important to understand the timeframes. This can easily be confused with the SECURE Act which passed toward the end of 2019, changing the RMD age to 72 going forward. Tuesday’s announcement extends relief to anyone who has previously taken an RMD in 2020 by extending the opportunity to return the funds up through August 31st, 2020. In addition, if you return funds under this new announcement, the notice states that the repayment is not subject to the one rollover per 12-month period or the rollover restrictions with inherited IRAs. This is particularly important because the SECURE Act changed the timeframe in which beneficiaries are required to withdraw inherited IRA funds. To find information about the SECURE Act changes, Paige Lee, CFA, wrote a great article which can be found here. There is a lot going on here, and the overall message is that you have more flexibility than ever on how you treat a 2020 RMD.
What was the original relief for RMDs?
The CARES Act (Coronavirus Aid, Relief, and Economic Security Act) was signed into law on March 27th, 2020, providing relief amidst the COVID-19 pandemic for many American taxpayers and businesses. We posted a blog that summarizes these changes which can be found here. In respect to RMDs, the CARES Act originally allowed individuals to forego taking a 2020 RMD and allowed you to return any RMD taken within the previous 60 days. Despite being a fantastic planning opportunity, anyone who took an RMD earlier that the previous 60 days was left out in the cold. Later in April, the IRS issued a follow-up notice that extended the time period to include those who took an RMD between February 1 and May 15 where the funds could be returned by July 15th. This is no longer the case with the most recent announcement, and now anyone who has taken an RMD from January 1st, 2020, can make the decision to return the funds.
How can you take advantage of this?
This offers a tremendous planning opportunity by providing households with the ability to shift income and take advantage of market conditions. Returning an RMD can lead to a host of strategic financial moves including the following:
- Continued growth of tax-deferred assets
- Opening room to make Roth IRA conversions
- A chance to look at taxable accounts to see if it makes sense to withdraw funds at capital gain rates as opposed to marginal tax rates
- Rebalancing—as the funds are returned, holdings can be adjusted to shore up your overall allocation
We help our clients make the best choices with the information available, and now that this new extension has been issued, we view this as an opportunity to review your circumstances, discuss the various options, and decide on whether or not to take action.
Connect with Merriman to discuss.
Here at Merriman, we are very excited about this announcement and strongly encourage you to contact us if you have already taken an RMD from your IRA or Inherited IRA this year. We’ll help you understand and explore your options and determine if taking advantage of this extended RMD relief makes sense for you.
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Mike came to Merriman after several years spent in corporate finance and brought with him an innate sense of discipline. Whether surfacing through routine, structure, or a desire for predictability, discipline often guides his decision making. He enjoys helping clients determine goals and create a plan to achieve them. He sincerely believes you can accomplish all you set out to with the right structure and discipline.
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