The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) Impact on Required Minimum Distributions (RMDs), Including Additional Recently-Issued IRS Guidance

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The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) was signed into law on March 27. One specific item in this Act was the suspension of all Required Minimum Distributions (RMDs) for 2020. As this Act was originally written, those who had distributed retirement plan or IRA assets between February 1st and May 15th had until July 15th to redeposit those distributions, if they wanted. Those who took a distribution in January were unable to use the July 15th deadline to redeposit those distributions. In addition, those who took multiple distributions from retirement accounts or IRAs were only allowed to recontribute one of those distributions (i.e. those receiving monthly IRA distributions could only redeposit one month’s IRA distribution). Finally, those who took a distribution from an Inherited IRA or Inherited Roth IRA were unable to redeposit those distributions at all.

Since the CARES Act was passed, we have been anticipating additional guidance from the IRS on certain issues, and also hoped they would make the law “more fair” by not effectively “penalizing” those who took distributions in January. Based upon guidance recently issued by the IRS, anyone who received an “RMD” or took any distribution from a retirement plan, IRA, Inherited IRA, or Inherited Roth IRA between January 1, 2020 and June 30, 2020, can redeposit the distribution back into the account, provided it is completed by August 31, 2020. Also, the limit on multiple IRA distributions being redeposited (again, those receiving monthly IRA distributions, for example) does not apply for distributions made between January 1, 2020, and June 30, 2020. Finally, the rule against redepositing Inherited IRA distributions and Inherited Roth IRA distributions does not apply to distributions made between January 1, 2020 and June 30, 2020, provided it is redeposited by August 31, 2020. Note, all of these changes apply to everyone’s distribution, not just those directly impacted by coronavirus.

In summary, any retirement plan or IRA distributions (including Inherited IRAs and Inherited Roth IRAs) that have been made between January 1, 2020, and June 30, 2020, can be redeposited by August 31, 2020, regardless of the number of distributions that have been made during this time frame. The redeposits could be for all or only part of the distributions taken this year, including any taxes withheld. For example, if receiving $4,000 of monthly income from January through June this year from an IRA, and having $1,000 per month withheld for taxes, $30,000 ($24,000 of income received plus $6,000 of taxes withheld) could be redeposited by August 31, 2020, and no tax liability associated with these distributions should be incurred (if only $24,000 is redeposited, $6,000 would still be deemed a taxable distribution). If $30,000 is redeposited, the $6,000 of withheld taxes could be refunded once the 2020 income tax return is filed.

Whether redepositing these assets makes sense from a tax perspective is unique to everyone’s circumstance. By redepositing the distributions, less taxes should be incurred this year, and the assets could receive future tax-deferred growth. However, receiving some distributions this year might help prevent next year’s RMD and associated tax liability from growing even larger. If this is the case, perhaps converting some of these already-distributed taxable withdrawals to a Roth IRA would be advantageous.

The additional guidance recently announced by the IRS is welcomed news, and this allows nearly everyone two months to implement any changes. We will continue to monitor the implications of the CARES Act and associated guidance, and we will articulate how these changes could impact your finances. For additional questions or to discuss your personal situation, please reach out to your wealth advisor.

Sources:
The Internal Revenue Service (https://www.irs.gov/pub/irs-drop/n-20-51.pdf)
Ed Slott and Company, LLC (https://www.irahelp.com/forum-post/58873-cares-act)


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