If you took a mandatory distribution from a legacy retirement account this year, the IRS will allow you to return the money.
The CARES Act, which became law on March 27, allowed people to omit the minimum distributions required for 2020.
This is the annual withdrawal you must take from your individual retirement account and 401 (k) plans after you turn 70½, or, as of this year, 72.
Recipients of legacy IRAs were also allowed to avoid this year’s RMDs, but were unlucky if they had already withdrawn the money, until last week.
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The IRS has now relaxed the rules for those who took their RMDs in 2020, giving them until August 31 to return the cash to the account.
This relief also applies to beneficiaries of legacy IRAs, a surprising move that the law would otherwise not allow.
“Surprising is more indicative of the real sentiment here,” said Jeffrey Levine, CPA and director of advanced planning for Buckingham Wealth Partners in Long Island, New York.
“I have not spoken to anyone who thought the IRS could do this if they wanted to,” he said. “They are blatantly contradicting the existing law.”
Skip or replace RMD
Before last week’s RMD relief from the IRS, retirement savers who already took the distribution this spring would have had to do what’s known as a 60-day rollover to reverse the withdrawal.
To qualify, you would have had to re-deposit the withdrawal into the IRA within 60 days of distribution. Nor should you have made any transfers from one IRA to another in the past 12 months.
You would also have to replace the taxes withheld from the withdrawal.
The problem is that 60-day transfers are not allowed for inherited IRA beneficiaries, but now they have a special exception only for 2020.
You are returning the RMD and you do not have your federal return, but what if your state does?
Dan herron
CPA and director of elemental wealth advisers
How the IRS implemented the change was also out of the ordinary.
Typically, Congress draws up legislation and once enacted, interpretation and enforcement is done by regulatory agencies.
The IRS-implemented RMD relief on legacy IRAs skipped that process, Levine said.
“It’s one of those things where the Treasury Department and the IRS should work with Congress and say, ‘The next bill to pass this year, let’s make sure we attach an amendment,'” he said. “Then it is done legally and correctly.”
If you are benefiting from relief, take it. Just don’t expect a similar measure next year.
“It is limited in scope and only for this year for distributions that would have been RMD had it not been for the CARES Act,” said Levine.
What you should know
Recipients of retirement accounts generally must make annual withdrawals each year based on their own life expectancy.
The SECURE Law amended this law so that people who inherit in 2020 and later have to liquidate the account within 10 years.
If you are lucky enough to not need the money, undoing the RMD by 2020 could cut your tax bill. These withdrawals are normally subject to income tax.
“The most important question would be: ‘Do you want to reduce your tax liability? Or do you need the money?'” Levine said.
“However, getting him out this year, if his income is lower, maybe he lost a job, it might not be the worst in the world,” he said.
As the federal government gives you authorization to replace the RMD of your legacy IRA, talk to your tax professional to see if your state will also agree to Uncle Sam’s guidance.
“You are returning the RMD and do not have your federal return, but what if your state counts?” asked Dan Herron, CPA and director of the Elementary Wealth Advisors in San Luis Obispo, California.
“These are the differences that you are going to have.”
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