The CARES Act suspended retirement plan RMDs for retirees and their beneficiaries. More than one year later, here are the implications for 2020 tax filings and ongoing obligations
In late March 2020, the federal government passed the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), a voluminous piece of legislation intended to offer some relief to taxpayers during the early stages of the COVID-19 pandemic.
Section 2203 of the Act provided retirement plan investors with the option to waive their required minimum distribution (and subsequent tax burden) from their pre-tax retirement plans for the calendar year 2020. It also permitted rollovers of RMDs taken before the waivers were announced and extended the 60-day rollover period for certain distributions.
In addition to removing a potentially unwanted source of taxable income or a hefty penalty for not taking the distribution, the waiver allowed plan holders to wait out a volatile market. Dropping the RMD meant investors could keep their funds intact until 2021, when hopefully market conditions would improve.
Some background information
In a “normal” year, holders of specific types of retirement plans are required to take a minimum distribution from their plans, starting at age 70½ (for those born before July 1, 1949) or 72 (for those born after July 1, 1949). The plans covered by this section of the IRS Code are traditional IRAs, employer-sponsored plans such as 401(k)s, and Roth 401(k)s.
Both retirees and their beneficiaries, including most non-spousal heirs who inherited tax-deferred accounts, are covered by these regulations. Typically, the minimum amount of distribution is based on a formula that weighs the plan holder’s age and the tax-deferred account balance as of December 31 the previous year. It uses the IRS distribution table (commonly, the IRS Table III or Universal Lifetime Table).
Section 2203 of the CARES Act added language to the IRS Code that provided a temporary waiver of the RMDs for defined contribution plans and IRAs for 2020. It added one more year for beneficiaries who were anticipating the end of their five-year distribution from an inherited plan in 2020, and specified which plans were eligible for special rollover considerations.
The amended rules were effective in 2020 only. The waiver provision was not in the December 2020 COVID-19 relief act nor in any subsequent relief acts.
Understanding rollovers: the fine print
The IRS announced in June 2020 that people who had already taken their RMDs from certain accounts before the CARES Act was passed were able to “return” the funds by rolling them (up to the gross amount) back into the same account or another qualified retirement account. In the notice, the IRS extended the usual 60-day rollover period to August 31, 2020.
If the rollover option is chosen, the plan holder is precluded from performing another rollover within a one-year period. The rollover allowance is not extended to beneficiaries with inherited accounts.
In a “normal” year, rollovers of RMDs are not permitted, even within the 60-day period. It’s important to understand that in 2021, once a distribution is taken, it cannot be returned.
Impact on 2020 tax filings
Usually, any part of an RMD that was taken and not repaid in time (including the withheld taxes) is considered taxable income. Distributions taken in the second half of 2020 are also taxable.
But the “pandemic waivers” may complicate tax filings this year, particularly if you took your distribution before the passage of the CARES Act and then used the “rollover clause” to return the funds. According to Section 2203 of the CARES Act, “distributions that otherwise would have been RMDs are not subject to eligible rollover distribution tax withholding rates, but they remain subject to 10% withholding rules.”
There is no way to reverse the tax withholding, but you could be eligible for a refund of the entire withdrawal in your yearly tax filing.
If you receive a 1099-R form that seems inaccurate, it’s because the 1099-R is used by plan custodians to report distributions, but not any following actions. The 1099-R will not reflect any repayments or rollovers made, even if they were technically “on time.”
Instead of altering the 1099-R or asking for a revision, report the rollover on your federal tax form:
- The total distribution from the IRA must be indicated on line 4a of Form 1040.
- Then enter “Rollover” next to line 4b.
- If the total distribution was rolled over, enter zero on line 4b.
- Otherwise, enter the portion not rolled over on line 4b.
- You can reclaim the withheld taxes as a tax credit on your 2020 return (use Line 25b).
Other points to consider
If you have already prepared this year’s taxes, be aware that the RMDs must be taken again in 2021. Any plan holder who is older than 72 must take an RMD by December 31, 2021. Plan holders turning 72 in 2021 have until April 2022 to take their first RMD.
Lindberg & Ripple features a team of experienced wealth advisors who can help manage the complexities of planning for retirement and comply with changing regulations. We’ll help you develop and maintain a customized plan designed to grow and preserve wealth for future generations. Contact us to learn more.