July 17, 2020
Tax Day deadline was Wednesday, July 15th, but there’s another important upcoming deadline you should be aware of. The deadline for anyone who wishes to return money taken out of retirement accounts in 2020 is Aug. 31st.
Since March’s CARES Act, for 2020, required minimum distributions, or RMDs, that many retirees must take from tax-deferred 401(k) and individual retirement accounts has been suspended. Those who contribute to tax-deferred retirement accounts, such as traditional IRAs and 401(k)s, don’t pay income tax on the money they put into these accounts. But starting at either age 70 ½ (for those born before July 1, 1949) or at age 72 (for those born after June 30, 1949), the government requires them to start withdrawing a set percentage of the account balance and paying income taxes. (Roth account owners are exempt from RMDs, although beneficiaries who inherit these accounts must take them.)
Covid-19 Provisions & Age Limits
For those who had taken RMDs before the suspension was announced, some have since put the money back using a tax rule that permits account owners to do so within 60 days. The IRS also announced in April that it would allow many people who took RMDs between Feb. 1 and May 15 to put the money back prior to the July 15th deadline.
When returning an RMD, you can deposit the money in the account it came from or in another tax-deferred account.
Provisions in the stimulus bill also raised the limits on 401(k) loans and loosened the rules on distributions from retirement accounts. People affected by the coronavirus crisis can withdraw up to $100,000 without the 10% penalty that normally applies before age 59½.
On June 19, the IRS expanded the definition of who can take these distributions to include people with job offers that have been rescinded or start dates that were delayed. People who have been diagnosed with the virus or have spouses or dependents who have been diagnosed also qualify. Those who have been hurt financially are also eligible, due to a layoff, business closure, quarantine, reduction in hours, or inability to work due to a lack of child care. Someone who has suffered financially due to a loss of income by a spouse or household member also qualifies, the IRS says.
How to Recoup the Tax Bill: An Example
There are a couple of ways.
Say you took a $30,000 RMD on Jan. 2 and asked your custodian to withhold $10,000 for taxes. You can return the $20,000 to a tax-deferred account and add another $10,000 from your pocket to make up for the amount that was withheld.
To recover the taxes, you can reduce your withholding or quarterly estimated payments or wait for a refund on your 2020 return.
An alternative is to let the government keep the $10,000 tax payment and convert the $20,000 to a Roth IRA by Aug. 31. Once in a Roth, the $20,000 can grow tax-free.
To discuss your retirement accounts and RDM repayment options best suited to your unique financial goals contact a wealth management professional today.
Deanna LaPier
Financial Advisor
Blog Referenced from the Article “IRS announces rollover relief for required minimum distributions from retirement accounts that were waived under the CARES Act” from irs.gov and "IRS Provides Relief for Retirees on Required Distributions” from wsj.com