Recent tax law changes significantly affect the timing of certain retirement plan distributions to participants, beneficiaries and owners. First, the SECURE Act, passed late last year and generally effective on January 1, 2020, raised the age for required minimum distributions (RMDs). The new required beginning date for an employee or IRA owner is generally April 1 of the year following the calendar year in which an individual attains age 72. Previously, the age for triggering RMDs was 70½.
Second, in response to the effects of the COVID-19 pandemic and its impact on retirement account investment portfolios, the CARES Act waives RMDs for defined contribution plans—including profit sharing and 401(k) plans—and IRAs for 2020. This waiver also applies to 2019 RMDs for those individuals who had an April 1, 2020, required beginning date—who had turned 70½ in 2019—but were not paid in 2019 (and, therefore, the RMDs would have been due to be paid between January 1, 2020, and April 1, 2020).
Find out if the new required minimum distribution is right for you.
The Impact of the CARES Act on Required Minimum Distributions
While the CARES Act’s RMD waiver is welcome news for many retirees, the provision raised several questions including whether the waiver would apply to RMDs taken in January of this year and whether more than one RMD eligible for the waiver could be rolled over into the same or another IRA.
IRS Notice 2020-51 grants important relief by:
Specifically, with this Notice, the IRS gives a taxpayer who already received an RMD in 2020 the ability to roll it into an eligible retirement plan by the later of 60 days after the RMD is received or August 31, 2020. For example, if a plan participant received an RMD in January 2020, that participant will have until August 31, 2020, to roll over the RMD and avoid recognizing taxable income.
In addition, an IRA owner or beneficiary who has already received an RMD in 2020 can repay the RMD to the distributing IRA, even if the repayment is made more than 60 days after the distribution, as long as the repayment is made by August 31, 2020. Fortunately, the Notice also provides that the repayment is not treated as a rollover for purposes of the one rollover per 12-month period limitation. Thus, IRA owners who received monthly RMDs during the first few months of 2020 can repay those amounts by the later of 60 days after receipt of the RMD or August 31. Further, RMD repayment is not subject to the restriction on rollovers for inherited IRAs.
How to Choose if Roll Over of Required Minimum Distributions is Right for You
The Notice also provides answers to 12 common questions for employers and employees and includes a sample plan amendment for employers giving plan participants and beneficiaries a choice over whether to receive or not receive RMDs.
With the relief, and flexibility, provided by Notice 2020-51, retirees and those who have inherited IRAs will want to consider whether to roll over or repay any RMDs by August 31. The answer will generally depend on each person’s effective tax rate and need for cash.
Learn more about how the new required minimum distribution guidance applies to your tax planning situation.