The CARES Act has allowed the waiver of virtually all required minimum distributions (RMDs) for 2020. The act initially offered some relief for people who had taken their RMDs prior to the passage of the waiver. However, a recent IRS change has expanded the ability of those who had taken their RMD prior to the passage to undo their RMDs if they desire.
The CARES Act originally allowed those who had taken their RMD between February 1 and May 15, 2020 to undo them by repaying the money back into their retirement plan, up to the amount that would have been required as an RMD, by July 15. This did not apply to RMDs taken from inherited IRAs.
The recent IRS change now allows anyone who took an RMD from January 1 through June 30 to repay the money back into their IRA or eligible retirement plan account by August 31. These funds will not be taxed and will be treated as a tax-free rollover. Additionally, these repayments are not subject to one rollover per 12-month period rule. This now covers inherited IRAs as well, though any RMDs from an inherited IRA must be redeposited into the inherited IRA account. RMDs from defined benefit plans remain excluded from the RMD waiver, and hence, from this extension.
Reasons to Consider Repaying an RMD
There are many reasons why your clients might consider undoing 2020 RMDs taken, but not necessarily needed. Note any withdrawals in excess of their RMD amount are not eligible for this repayment option.
Many clients may not need some or all of their RMDs and would prefer not to take them and pay taxes on them each year. Repaying any amount taken within the time frame allows them to save taxes they would otherwise have to pay on these distributions. For some clients, this tax savings might translate into lower or no taxes on their Social Security benefits and lower Medicare premiums in the future.
This might also make some clients eligible for a recovery rebate credit because their 2020 income is reduced by the ability to repay these RMD amounts. This could drive their 2020 income to a lower level than in prior years, which is income that was likely used to calculate their stimulus check. If their stimulus check amount was reduced because they were over the income limit, they would receive the difference as a credit on their 2020 taxes due to their lower 2020 income
Putting the money back into the IRA, 401(k) or other retirement plan from which it was taken allows this money to grow tax-deferred for a longer period of time. Even another year’s worth of growth could be significant for some clients.
Doing a Roth conversion
Clients who took an RMD before the CARES act waiver might consider repaying the money and then doing a Roth conversion if the money is repaid into a traditional IRA account. If they convert the amount repaid into the account, there will be little or no difference in the tax amount to be paid for 2020. Additionally, the amount converted will be out of their IRA and not part of the calculation of RMDs in future years.
For those clients who took their RMD prior to the passage of the CARES Act and whose finances allow, discussing the benefits of repaying this money into the retirement account from which it was taken is prudent.