The recently enacted CARES Act suspends the requirement that most retirement account owners take a distribution from their accounts for 2020. There are some exceptions, of course. And if you’ve taken an unwanted distribution, there are some opportunities to roll that money into another tax-deferred account.
The suspensions generally apply to inherited IRAs. Unfortunately, an unwanted inherited IRA distribution can’t be rolled into another tax-deferred account.
At bottom, if you don’t need the money from an upcoming distribution, then you may not want to take it. And, there are several ways to roll an already received and unwanted RMD into another retirement account. These methods are described below.
Below are answers to five common questions about RMD suspensions.
1. What are required minimum distributions?
A required minimum distribution (RMD) is the amount of money that must be withdrawn from a retirement account by its owner of retirement age. Retirement accounts include traditional, SEP, or SIMPLE individual retirement accounts (IRA) and qualified plan (e.g., 401k, 403b).
Congress changed the age for withdrawing from retirement accounts in 2020. It now must happen by April 1 following the year account holders reach age 72 (prior to 2020, the RMD age had been 70½ years old). The retiree must then withdraw the RMD amount each subsequent year based on their life expectancy. As you get older, the withdrawal percentage increases.
The federal government wants to tax the money, which has grown tax free since you contributed it. The distributions are, in essence, deferred wages. You don’t necessarily have to spend the distribution. You just have to remove it from the tax-deferred status and can deposit it in taxable account (e.g. a bank account).
2. Which distributions are suspended?
The CARES Act suspended required distributions from individual retirement accounts, such as traditional IRAs, SIMPLE IRAs and SEP IRAs.
It also suspended required distributions from 401(a), 401(k), 403(a) and 403(b) plans. For-profit entities offer 401(k) plans. Not-for-profit entities, public schools and universities offer 403(b) plans.
The CARES Act also suspended required distributions from 457(b) plans that States or their subdivisions maintain. Public-school teachers typically use 457 plans.
The Act also suspended to participants in the Federal Thrift Savings Plan – the retirement plan for federal government employees.
It did not suspend RMDs from defined benefit plans (e.g., a pension), non-governmental 457(b) plans, annuities held in IRA, 401(k), 403(b) and other qualified plans.
And RMD rules do not apply to Roth IRA account holders.
3. What is suspended?
The CARES Act suspended RMDs for any one subject to an RMD in 2020. It also suspended RMDs for persons who are subject to their first-year RMD in 2020.
Currently, in the first year you are subject to an RMD, you can delay the first year’s distribution until April 1 of the following year. Although in the following year, you must take two RMDs – one for the prior year and one for the current year.
The CARES Act suspends both RMDs for 2020.
4. What can you do if you’ve taken your RMD and you don’t want it?
You have three options depending upon when you received the distribution.
a. 60-day rule
You can roll the money into another plan/IRA by using the 60-day rollover window. This method means you have to catch the unwanted distribution within 60 days of receipt of the distribution. You roll it into another tax-deferred account (e.g., from the TSP to an IRA).
This method may be water under the bridge for distributions in January or February 2020. But it can be used if you receive an unwanted RMD on, for example, September 15th. You have until November 14th to roll it into an IRA.
b. IRS Notice 2020-23
If you received the distribution on or after February 1, 2020, IRS Notice 2020-23 allows you to roll it into another plan (IRA or 401k) by July 15, 2020. Again, you must roll the money into another account (not back into the same account).
c. Coronavirus-related distribution
The CARES Act creates a new penalty-free distribution “Coronavirus-Related Distributions” that you can use to rollover an unwanted RMD into another plan. A Coronavirus-related distribution is one in which the taxpayer subject to the RMD, their spouse or dependent:
- was diagnosed as COVID-19 positive, or
- experienced financial hardship due to being quarantined, furloughed, laid off, unable to work because of a lack of childcare options, subject to reduced hours, or a business owner with shuttered operations.
One of these conditions has to be have occurred during 2020 (and, interestingly, not prior to receiving the distribution).
You can roll these distributions into another account within three (3) years of receiving the distribution.
Be mindful with all three of these methods of the once-a-year IRA rollover rule. If you’ve rolled money out of an IRA, then you can’t do another one until 365 days since the last one. But you could transfer the unwanted IRA distribution to an employer-sponsored plan (e.g., 401k) if you still have one. You could also use the coronavirus exception to avoid this once-a-year IRA rollover because you have three years to do it.
One novel strategy is to roll the unwanted IRA RMD into a Roth IRA. The distribution amount would be taxable (and the idea here was to avoid taxes). You must do this rollover within 60 days of the unwanted distribution or until July 15, 2020 (if you received the distribution after February 1, 2020).
5. What about Inherited IRAs?
The CARES Act suspended RMDs from designated beneficiary inherited IRAs. The beneficiary must be using the stretch life expectancy method for their distribution (which most folks do).
Unfortunately, Congress did not provide relief for unwanted distributions from Inherited IRAs.