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.