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The CARES Act and RMDs — What You Need to Know


The Coronavirus Aid, Relief and Economic Security Act (CARES) Act that was signed into law in late March contains a number of beneficial provisions designed to lessen the economic damage caused by the coronavirus pandemic. 

One provision that hasn’t gotten as much attention as some of the others is the suspension of required minimum distributions (or RMDs) from traditional 401(k) plans and IRAs this year. That’s right: If you are 72 years of age or over and normally would be required to take an RMD this year, you no longer have to do so.

What Are RMDs?

Traditional 401(k)s and IRAs allow you to grow your retirement funds on a tax-deferred basis. This can result in a substantially larger nest egg when you retire compared to having to pay income taxes on your savings each year.

But Uncle Sam won’t let you keep your money in a tax-deferred account indefinitely. When you turn 72, you must start withdrawing a minimum amount from your account each year and pay income tax on these distributions. These withdrawals are required whether you need the money to pay for your living expenses in retirement or not.

The cost of failing to take RMDs is steep: a tax penalty of 50 percent of the amount of money that should have been distributed. The amount of your RMD each year is based on the balance in your account on December 31 of the previous year. This is then divided by the applicable distribution period or a life expectancy factor that’s based on your age (see IRS Publication 590-B for more details).

Rolling RMDs Back into Retirement Accounts

If you don’t need distributions from your retirement account to meet everyday living expenses, it’s generally beneficial to leave the money in your account to continue growing tax-deferred and delay payment of income taxes. Also, the extra income could push you into a higher tax bracket for the year as well as a higher income bracket for Medicare premiums.

This is exactly what the CARES Act allows you to do this year. But what if you already took RMDs that you would have preferred not to have taken? There’s good news here, too: You can put the money back in your retirement account and avoid these negative impacts.

You normally have 60 days from the date of a retirement plan distribution to rollover the funds back into the account or into another retirement account without any tax consequences. If you took an RMD in January, February or March of this year, the 60-day window has already passed. 

However, the 60-day window doesn’t apply if you have been directly affected by the coronavirus pandemic. If you took an RMD more than 60 days ago, you can still return the money to your account or another retirement account and avoid tax consequences if you meet one of these conditions:

  • You, your spouse or your dependent has been diagnosed with COVID-19 or SARS-CoV-2.
  • You or your spouse has experienced adverse financial consequences due to being quarantined, furloughed or laid off, or you’ve had your work hours reduced or you’re unable to work due to a lack of childcare. The same goes if you own a business and have had to close, reduce operations or care for a child due to the pandemic.

Repay the Entire RMD

Keep in mind that if you decide to rollover an RMD back into your retirement account, you must repay the entire amount of the RMD, including any taxes that were withheld. For example, if you took a $10,000 RMD and had 10% withheld for taxes, you pocketed $9,000. When you repay the RMD, you’ll have to repay the entire $10,000.

The details involved with rolling RMDs back into retirement accounts can get complicated. Give us a call if you have questions or need assistance with your particular situation.

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