IRS extends deadline for retirees to undo required distributions

If you took a minimum required distribution out of your retirement account before the CARES Act went into effect, you have more time to undo it.

The Internal Revenue Service this week enacted guidelines that allow any taxpayer who took the distribution since January to re-enter it into their retirement account before August 1. Previously, taxpayers had 60 days to do so after the CARES Act was enacted on March 27.

This change applies to both beneficiaries and retirees who turned 72 years old as of January 1, 2020.

“The rules basically say that even if COVID has not impacted you, if you have taken money out of your IRA, you can return it to an IRA by August 31, 2020 without asking questions and those transfers will not count towards your one time transfer per 12 period. months, “said Jon Swanburg, director of financial planning for Tri-Star Advisors Inc.” This provision ends in approximately two months. “

Smiling retired senior male using a smartphone while sitting with a dog in the room at home

Experts said the guidelines will especially benefit those who have not saved enough for retirement.

“Being able to reinvest an RMD they’ve already taken out will allow them to save more for the years they are no longer working,” said Mitchell Kraus, co-founder of Capital Intelligence Associates, a financial advisory firm. “This will especially help those who are still working because they haven’t saved enough for retirement by allowing their retirement plan to continue building with tax-deferred.”

The minimum required distributions are annual amounts that must be withdrawn from your retirement accounts for those turning 72 and for beneficiaries. The amounts are determined based on the balance and life expectancy of the retiree or beneficiary, according to the IRS.

But RMDs are taxed as ordinary income, so transferring them back to your IRA or 401 (k) can reduce your tax bill.

“The government uses RMDs to claim the tax revenue they did not get when the money was taken away,” Kraus said. “They deferred taxes, but they finally need that income.”

Some retirees may benefit from returning their RMD if reversing it qualifies them for a relief payment they didn’t qualify for before, said Mark Smith, president of Vision Wealth Planning. Or undoing it could put you at a lower level of the Medicare premium.

“We are running the tax numbers so that customers see what makes sense. Some customers have already returned some of their RMDs under the original CARES Act, ”said Smith. “We don’t necessarily want to pay it all back, depending on other income and arbitration of tax brackets between fiscal years.”

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The IRS also recently announced that people who had a delayed work start date or had an offer removed due to the pandemic may also receive up to $ 100,000 in retirement withdrawals without penalty. The withdrawal is also tax free if the full amount is returned within three years, starting in 2020.

Previously, only those who were laid off, had their hours reduced, or had their health compromised were eligible for the break.