Undo Your 2020 RMD

July 1, 2020 - Published by IAG Wealth Partners

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How often does the IRS give you permission to do something illegal?

If you own a beneficiary retirement account and took your Required Minimum Distribution (RMD) early in 2020, this could be your lucky day.

As you likely know, the Coronavirus Aid, Relief and Economic Security (CARES) Act signed into law earlier this year permitted taxpayers to skip taking their 2020 RMDs. This includes both taxpayers who have reached RMD age (either 70.5 or 72 depending on when you were born) and taxpayers who own beneficiary retirement accounts.

Since the CARES Act was not signed into law until March 27, some very diligent individuals had already taken their 2020 RMD by the time Congress cancelled them. We have been waiting for the IRS to clarify whether and how these folks would be able to return their RMDs to their retirement accounts.

Last week the IRS released Notice 2020-51 which clarifies this process. Quite honestly, the IRS exceeded our expectations in creating flexibility for our clients.

If you took your age-related (and now unnecessary) RMD early in 2020 and would like to roll it back into your retirement account, the IRS extended the usual 60-day rollover rule to August 31, 2020 for those funds. That is great news!

In a strange twist, the IRS is also allowing beneficiaries who took unnecessary RMDs in early 2020 to roll their RMDs back into their beneficiary retirement accounts by August 31, 2020. This is unusual because it is against the law for taxpayers to do rollovers to or from beneficiary retirement accounts. All withdrawals from beneficiary retirement accounts are supposed to be irrevocable according to Congress, but it is unlikely that anyone will sue the IRS to reverse their illegal generosity.

If you took your 2020 RMD earlier this year and would like to roll it back into your retirement account we recommend starting that process now. Keep in mind that any taxes withheld from your retirement account distribution cannot be reversed, so you would need to rollover the entire distribution amount (not just the amount you netted after taxes) to fully avoid paying taxes on your unnecessary 2020 RMD.

As always, we strongly encourage you to work with your tax professional to develop your personal tax strategy as everyone’s tax situation is unique.



Quote of the week: Dave Barry: “We’ll try to cooperate fully with the IRS, because, as citizens, we feel a strong patriotic duty not to go to jail.”


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