The CARES Act: RMD Updates
by P.J. DiNuzzo April 17, 2020
The CARES Act: RMD Updates
A new tax law, the Coronavirus Aid, Relief, and Economic Security (CARES) Act which was signed into law on March 27, 2020, waives required minimum distributions (RMD) for 2020. With a few exceptions, this waiver applies to the retirement accounts that you hold as an original owner, and retirement accounts that you inherited and hold as beneficiary retirement accounts.
As a result of this waiver, you have no RMDs for 2020.
Had it not been for this waiver, you would have been required to take RMDs for 2020 if you were at least age 70 ½ on December 31, 2019; and had assets in your own traditional IRA, SEP IRA for SIMPLE IRA (collectively referred to as traditional IRA for this purpose). This RMD requirement also applies to any amounts that you hold- as owner- in an employer sponsored retirement plan, such as a 401(k), 403(b) or profit-sharing plan (employer plan), unless the plan allows you to defer RMDs past age 70 ½ until retirement and you were still employed by the plan sponsor on January 1, 2020.
This waiver also applies to any RMD that you were required to take in 2019 because it was your first RMD year, but you waited past 2019 - as you are eligible to do- until as late as April 1, 2020 to distribute the amount.
RMDs do not apply to Roth IRAs that you hold as owner.
For your beneficiary accounts- including beneficiary Roth IRAs, your beneficiary profile determines whether you are required to take RMDs from those accounts for 2020.
What You Should Do Now
The steps that you should take now depends on whether you want to have distributions made from your retirement account for 2020. These include:
If no distribution has been made and you do not want distributions made for 2020: If you do not want to take distributions for 2020, there is no action required unless you have an automatic/prescheduled distribution arrangement with your financial institution. In that case, you must contact your financial institution and instruct them that you no longer want those distributions to be made from your account(s). Your financial institution might require that you provide written instructions, or they might honor instructions provided over the telephone.
If you already took distributions in 2020 and want to return those amounts to your retirement account: You may roll over all or a portion of a distribution, but only if the amount is eligible to be rolled over to your retirement account. The following are some rules that must be taken into consideration if you plan to roll over any portion of your distribution(s):
Rule Number 1: Distributions from any Beneficiary retirement account that you hold may not be rolled over, unless you inherited the account from your spouse. If the account was inherited from your spouse, you may roll over the amount to your own (not a beneficiary) account.
Rule Number 2: If the distribution was made from a traditional IRA it may be rolled over to another traditional IRA only if you did not do the same thing* during the preceding 12 months.
*That is, only if you did not take a distribution from a traditional IRA and rolled over
any portion of the amount to another traditional IRA, or did not take a distribution
from a Roth IRA and rolled over any portion of it to the same or another Roth IRA.
Please note: This same limitation – the one per 12-month rule- also applies if you inherited a Roth IRA from your spouse, and plan to roll over any distribution from that Roth IRA.
Caution: Periodic Distributions
If you take periodic (monthly, quarterly or other frequency) distributions from a traditional IRA, only one of those distributions may be rolled over to another traditional IRA within a 12-month period.
This 12-month rule does not apply to rollovers that involve an employer plan, whether on the distribution side or the rollover side.
Rule Number 3: The rollover must be made to an eligible retirement plan. For the most part, a distribution from one type of retirement plan can be rolled over to the same type or a different type of retirement plan. However, there are some prohibitions. For example, if your distribution is made from a designated Roth account- such as a Roth 401(k), that amount may be rolled over only to another designated Roth account or to a Roth IRA.
Rule Number 4: The rollover must be completed within 60-days of you receiving the distribution amount.
If you are at risk of breaking Rule Number 2 with a distribution from a Traditional IRA you may:
A. Roll over the amount to a Roth IRA instead. In this case, the amount must be deposited to your Roth IRA as a Roth conversion. While a rollover of an eligible amount from a traditional IRA to the same or another traditional IRA results in the distribution being nontaxable, a conversion to a Roth IRA would result in any pre-tax portion of the amount being taxable. However, unlike traditional IRAs, where earnings are tax-deferred and taxable when distributed, earnings in a Roth IRA are tax-free when you become eligible for a qualified distribution.
B. Roll over the amount to a traditional account under an employer plan, such as a 401(k) or 403(b), if you are a participant in the plan and the plan permits rollovers of such amounts. You would need to check with the plan administrator to determine whether the plan would accept such rollovers. A rollover of a distribution from a traditional IRA to an employer plan would result in the transaction being nontaxable.
If you plan to roll over your distribution to a different type of retirement account from the one from which the distribution was made, please contact us, and we will help you to determine if such a rollover is allowed.
If you are at risk of breaking Rule Number 4: please contact us immediately. There are a few circumstances under which the 60-day deadline could be waived, and we will help you to determine if you qualify for such a waiver.
Rollovers When Taxes Were Withheld
If you took a distribution from which you had amounts withheld for federal and/or state taxes, and you want to roll over that distribution; your options include rolling over the net amount that you received, and rolling over the gross distribution amount by making up the withholding tax amount out of pocket.
For example: Assume that your distribution was for $100,000 and you had $20,000 withheld for federal taxes.
You may roll over the $80,000 that you received. In that case, the $20,000 would be treated as income on your tax return. Or,
You may roll over the $100,000 by making up the $20,000 out of pocket. In this case, the entire $100,000 would be excluded from your income.
In either case, the $20,000 would serve as a prepayment of your 2020 taxes, and either increase any tax refund or reduce any income tax owed.
We Are Here to Help You
We anticipate that you will have questions about this new tax law; including how it affects your RMD and retirement savings. We are here to help you. Please do not hesitate to contact us with your questions.
 Exceptions apply to Defined Benefit plans and nongovernmental 457(b) plans
© 2020 Appleby’s IRA Publications, LLC.
P.J. DiNuzzo, CPA, PFS™, AIF®, MBA, MSTx
President, Founder, and Chief Investment Officer