The CARES Act allows any taxpayer required to take required minimum distributions (RMDs) from IRAs, 401(k)s, 403(b)s, and certain other plans in 2020 to skip those RMDs in 2020. This includes anyone who turned 70 ½ in 2019 and would have had to take their first RMD by April 1, 2020.
Yes, this will be treated as a tax-free rollover. IRS Notice 2020-51 provides rollover relief (including an extension of the normal 60-day rollover period) which permits certain repayments to retirement plans. What this means is you must return the funds before August 31, 2020 to qualify for the tax-free rollover. Even if you took an RMD in January 2020 (prior to the coronavirus outbreak), it would be covered.
What about my inherited IRA? Does the RMD waiver apply to this?
Yes, the RMD suspension applies to the following:
- Defined-contribution plans such as 401(k)s, 403(b)s, and 457(b) plans from government employers
- Federal Thrift Savings Plans
- Owners of inherited IRAs and plans
How do I treat taxes withheld from my RMDs if I return the funds?
Make sure to return your gross RMD to avoid any portion of the distributions being taxed. For example, if you took out a $10,000 RMD from your IRA in January 2020 and opted to have 20% in federal income taxes withheld from the total distribution, this results in a net payment of $8,000. In order for the entire RMD amount to be treated as a tax-free rollover, you must repay the full $10,000 to your IRA before August 31, 2020. Then, on your 2020 Form 1040 tax return, you will claim the $2,000 withheld as taxes paid and possibly recover as a refund.
What if I receive my RMD from my traditional IRA in monthly installments, am I still able to return the funds?
Yes, even though under tax law, typically you cannot make more than one rollover from your IRA within a one-year period, the IRS has provided some relief regarding this rule. You can still recontribute your RMDs back to your IRA, provided you do so before August 31, 2020.
What if I received an RMD from my IRA in February 2020 in the form of stock and then I later sold the shares, am I still allowed to recontribute the proceeds and treat it as a rollover?
No, this transaction (same-property requirement for IRA rollovers) does not qualify and has not been waived. This is because when you do an IRA rollover, you are required to roll over the same type of property that you originally received from the account. For example, if you took an IRA RMD of 500 shares of stock, then those full 500 shares must be put back, regardless of whether their value increased or decreased since the distribution was originally taken.
What about RMDs for 2021? Are these waived as well?
No, but Congress could change this in the future so stay tuned!
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