Fixing Unwanted RMDs Taken Before The CARES Act Waiver Of 2020 RMDs

*** Author’s Note: Since the publish date of this article, IRS Notice 2020-51 has altered certain provisions that are discussed below. See New Rollover Rules For Unwanted 2020 RMDs for more info.

On March 27, 2020, the Coronavirus, Aid, Relief, and Economic Security Act – better known as the CARES Act – was signed into law by President Donald Trump. The law, the third in a series of coronavirus/COVID-19-related relief legislation (beginning with the Coronavirus Preparedness and Response Supplemental Appropriations Act of 2020, which was followed shortly thereafter by the Families First Coronavirus Response Act of 2020), will most likely be remembered for its Recovery Rebate (the ‘stimulus checks’) provision and the creation of the much-hyped Paycheck Protection Program. But for many financial advisors whose clients are affluent retirees (and/or beneficiaries of retirement accounts), the provision that may have the biggest financial impact on their clients is the CARES Act’s suspension of Required Minimum Distributions (RMDs) during 2020.

Breaking Down The Types Of Required Minimum Distributions (RMDs) Waived By The CARES Act

Section 2203 of the CARES Act provides broad relief to retirement account owners and beneficiaries who would normally be subject to Required Minimum Distributions. However, while the relief is, in fact, broad, it is not absolute. Accordingly, some retirement account owners continue to be subject to RMDs for 2020.

2020 RMDs Waived For IRA, 401(k), 403(b) And Other Defined Contribution Plan Owners

Section 2203(a) of the CARES Act amends IRC Section 401(a)(9), which outlines required distributions from qualified pension, profit-sharing, and stock bonus plans, by adding a new subparagraph, Section 401(a)(9)(I), to the end of the original Section. The added subparagraph includes three subsections, that effectively suspend RMDs for all defined contribution plan accounts, as well as for IRAs.

More specifically, newly created IRC Section 401(a)(9)(I)(i)(I) suspends RMDs for “a defined contribution plan which is described in this subsection or in section 403(a) or 403(b)” [emphasis added].

As such, 401(a) plans, such as Money Purchase Pension Plans, and 401(k) plans (which are effectively covered by the “in this subsection” language) , as well as the explicitly referenced 403(a) and 403(b) plans, do not have RMDs for 2020.

New IRC Section 401(a)(9)(I)(i)(II) provides the same relief for “a defined contribution plan which is an eligible deferred compensation plan described in section 457(b) but only if such plan is maintained by an employer described in section 457(e)(1)(A)” [emphasis added]. In turn, Section 457(e)(1)(A) describes “a State, political subdivision of a State, and any agency or instrumentality of a State or political subdivision of a State.” Thus, participants in governmental 457(b) plans do not have to take RMDs during 2020 either.

Finally, new IRC Section 401(a)(9)(I)(i)(III) eliminates RMDs during 2020 for “an individual retirement plan.” Accordingly, RMDs for IRAs, including SEP and SIMPLE IRA accounts, are suspended during 2020.

The suspension of RMDs during 2020 is further extended to participants in the Federal Thrift Savings Plan (TSP). Accordingly, on April 13, 2020, the TSP  posted an update to its website stating, in part, “You do not need to make any withdrawals from your TSP account in 2020 to satisfy an RMD, regardless of your age or employment status.”

Procrastinators Win The Day As Yet-To-Be-Distributed 2019 First-Year RMDs Are Waived Too

For some retirees who were just due to begin RMDs, the no-RMDs-in-2020 good news gets even better!

More specifically, under new IRC Section 401(a)(9)(I)(ii), individuals who (absent changes made by the CARES Act) had a Required Beginning Date (RBD) in 2020 and who did not take their first RMD last year (in 2019) and were waiting until the normally-April-1^st deadline, do not have to take either the delayed (and now non-existent) 2019 RMD or their 2020 RMD!

Stated differently, the CARES Act not only suspends RMDs for the types of retirement accounts discussed above for 2020 but rather, it suspends any RMD that could have been timely taken in 2020 for those accounts. Which applies in practice for two types of retirees who may benefit from the double-RMD waiver: those who turned 70 ½ in 2019, but who did not yet take their 2019 RMD; and some (even) older taxpayers who retired last year, but who were previously able to delay RMDs due to the “Still-Working Exception”.

Nerd Note: Section 2203 of the CARES Act is largely borrowed from Section 201 of the Worker, Retiree, and Employee Recovery Act (WRERA), which similarly suspended Required Minimum Distributions for 2009. The latter, however, did not waive the requirement for 2008 first-year RMDs that had not yet been taken.

Example #1: Josh is a Traditional IRA owner who turned 70 ½ on March 20, 2019. Not wanting to take a distribution from his Traditional IRA until absolutely necessary, Josh did not take his first RMD in 2019, but rather, planned to do so in early 2020.

Since Josh turned 70 ½ in 2019 (and was, therefore, ineligible for the SECURE Act’s new age-72 start for RMDs), his RBD was scheduled to be April 1, 2020.

However, as a result of the CARES Act’s suspension of RMDs, Josh does not have to take either his first RMD for 2019 (which would normally be due by April 1, 2020) or his second RMD for 2020 (which would normally be due by December 31, 2020).

For individuals who choose to continue working beyond the age at which RMDs are generally required, the Still-Working Exception was implemented by Congress to allow them to continue to benefit from the tax deferral offered by their employer’s 401(k), or similar plan, throughout their ongoing employment years. This provision delays an individual’s RBD to April 1 of the year following the year the employee retires (if that date is later than the April-1-of-the-year-following-the-year-the-participant-turns-70 ½ default date).

Example #2: Susan is a 78-year-old engineer who retired from her long-time employer on December 1, 2019. While she was working, Susan accumulated her retirement savings within her 401(k). Furthermore, during her employment, she qualified for the Still-Working Exception. Accordingly, she was not required to take any RMDs from her 401(k) account.

However, since Susan retired in 2019 and did not work throughout the entire year, the Still-Working exception no longer applied, and an RMD popped into existence for 2019. And therefore, her RBD was scheduled to be April 1, 2020.

Susan, having earned a full salary for 11 out of 12 months of the year, decided to push off her first RMD until 2020. Now, in light of the CARES Act, that decision would look even better, as the need to take the ‘pushed-off’ 2019 RMD and her ‘regular’ 2020 RMD are both eliminated.

Nerd Note: The CARES Act only waives 2019 RMDs of individuals who turned 70 ½ in 2019 if they did not take their RMD in 2019. If, however, such amounts were distributed in 2019, they continue to be treated as an RMD (and thus, are not eligible to be rolled over to another retirement account, as explained below).

Certain Required Minimum Distributions (RMDs) And Other Types Of Distributions Not Impacted By The CARES Act

As outlined above, the CARES Act provides RMD relief for a broad range of retirement plans. There remain, however, certain distributions from retirement accounts that must still be taken in 2020 in order to avoid penalties and/or other tax headaches.

In addition, other types of distributions are wholly unaffected by the CARES Act’s relief. Such distributions include the following:

• Required Minimum Distributions For Defined Benefit Plans. Recall that new IRC Section 401(a)(9)(I)(i)(I) suspends RMDs for 2020 for a “defined contribution plan which is described in this subsection or in section 403(a) or 403(b)” [emphasis added]. As such, individuals subject to RMDs from defined benefit plans continue to be subject to those obligations. This includes RMDs from traditional Defined Benefit Pension Plans, as well as Cash Balance plans.
• Required Minimum Distributions For Non-Governmental 457(b) Plans. New IRC Section 401(a)(9)(I)(i)(II) eliminated RMDs for 457(b) plans, “but only if such plan is maintained by an employer described in section 457(e)(1)(A)” [emphasis added]. As such, participants in similar plans maintained by a non-profit entity organized under IRC Section 501(c) (i.e., a “non-governmental 457(b) plan) continue to be subject to RMDs in 2020.
• Annuitized Annuities Held In IRA, 401(k), 403(b), and other Defined Contribution Plan Accounts. When an IRA or other defined contribution plan is invested in an annuity, and that annuity is annuitized, the tax rules essentially treat the amounts as ‘flipping’ from the defined contribution plan rules, to the defined benefit plan rules. And since the CARES Act only suspends RMDs for defined contribution plans, these annuitized distributions need to continue.
• 72(t) Distributions. While it’s fair to think about distributions under a 72(t) schedule (also known as a series of substantially equal payments) as ‘required’, they are not distributions required under IRC Section 401(a)(9). Rather, 72(t) distributions are taken in order to comply with the rules of IRC Section 72(t)! Note that this the case regardless of whether the amount of the 72(t) distribution is calculated using the Annuitization, Amortization, or the “RMD (life expectancy) method”. All such 72(t) distributions that were otherwise required in 2020 are still required.
• Qualified Charitable Distributions (QCDs). QCDs are unimpacted by the CARES Act legislation. As such, any IRA owner or IRA beneficiary who is 70 ½ or older can continue to utilize the provision to satisfy charitable intent. Such distributions won’t be able to offset an RMD (because there is no RMD to offset!), but still represent a tax-efficient way to donate entirely pre-tax dollars to charity.

CARES Act Provides Relief To Beneficiaries Of IRA, 401(k), 403(b) And Other Defined Contribution Plans

The relief from RMDs provided by the SECURE Act goes beyond the owners of retirement accounts, and extends to beneficiaries of inherited retirement accounts as well… both Designated Beneficiaries, and Non-Designated Beneficiaries.

Nerd Note: The SECURE Act split Designated Beneficiaries into two separate groups: Eligible Designated Beneficiaries and Non-Eligible Beneficiaries. That change, however, was not effective until (at the earliest) death occurring in 2020. Beneficiaries subject to RMDs in 2020 will by definition of the RMD rules have inherited from individuals who died in prior years. Thus, a discussion of the CARES Act’s impact on beneficiary RMDs can be limited to the ‘old’ Designated Beneficiary and Non-Designated Beneficiary categories only!

Designated Beneficiaries of any of the types of retirement accounts outlined above (IRA, 401(k), 403(b), governmental 457(b), TSP, etc.) using the ‘stretch’ life expectancy method to calculate post-death RMDs do not have to take an RMD in 2020.

The same is also true for Non-Designated Beneficiaries (e.g., charities, estates naming a will, and certain trusts) inheriting from decedents who passed away on or after their RBD (in which case the Non-Designated Beneficiary is required to distribute the inherited assets over the deceased owner’s remaining single life expectancy).

Notably, when calculating RMDs next year, in 2021, such beneficiaries (Designated Beneficiaries and for Non-Designated Beneficiaries inheriting from decedents who passed away on or after their RBD) will act as though the 2020 RMD was taken. More specifically, when calculating their 2021 RMD, they will subtract 2 from the factor they used when determining their 2019 RMD.

Example #3: Paul is the beneficiary of his mother’s IRA. His mother passed away in 2015, and in 2016, when Paul turned 41 years old, he took his first RMD from the inherited IRA using the corresponding Single Life Expectancy Table of 42.7.

Now, four years after taking his first inherited IRA RMD, Paul was prepared to take an RMD from the inherited IRA account using a factor of 42.7 – 4 = 38.7. Thanks to the CARES Act, though, this RMD is no longer necessary.

Next year, in 2021, when Paul calculates the RMD for his inherited IRA, he will not use the factor of 38.7 that he ‘should have’ used for 2020. Instead, when calculating his 2021 inherited IRA RMD, he will pretend as though 2020 was just like any other year.

Thus, because 2021 will mark the fifth year after the year in which Paul took his first inherited IRA RMD (based on a 42.7-year life expectancy), he will calculate the amount of the distribution using a factor of 42.7 – 5 = 37.7.

Non-Designated Beneficiaries who inherited from owners dying before their RBD also get a break under the CARES Act. Such beneficiaries – which include charities, Non-See-Through Trusts, and estates – are subject to the 5-Year Rule. Under this rule, all assets in the inherited retirement account must be distributed by the end of the fifth calendar year after the year of death.

The CARES Act, however, effectively turns the 5-Year Rule into a 6-Year for Non-Designated Beneficiaries whose 5-Year Rule includes 2020. New IRC Section 401(a)(9)(I)(iii)(II) states, “if clause (ii) of subparagraph (B) applies, the 5-year period described in such clause shall be determined without regard to calendar year 2020.’’

The following questions will determine if the 6-Year Rule applies:

• Is the beneficiary a Non-Designated Beneficiary? (Note: Technically, a pre-2020 Designated Beneficiary of an individual who died prior to their RBD would be eligible to elect to use the 5-Year Rule instead of the ‘stretch’. However, it is exceedingly rare to find a beneficiary who chose to do so.)
• Did the decedent die before their Required Beginning Date?
• Did the decedent die in 2015 – 2019?

If the answer to all three of these questions is “yes,” then, as shown in the chart below, the Non-Designated Beneficiary will be subject to what amounts to a 6-Year Rule.

Accordingly, the retirement account beneficiary may distribute as much, or as little, as they like from the inherited account during the first five calendar years after the calendar year of death. However, any amounts remaining in the account in the sixth year after death must be distributed prior to the end of the year.

Nerd Note: Non-Eligible Beneficiaries who are subject to the SECURE Act’s new 10-Year Rule get no special break under the CARES Act. As noted above, the SECURE Act first creates Non-Eligible Designated Beneficiaries for individuals inheriting in 2020. And since ‘Year 1’ of the 10-Year Rule isn’t until the year after death, 2020 is already excluded from that calculation. Thus, ignoring 2020 for purposes of calculating the 10-Year Rule would have no effect on any beneficiaries.

Rules For Fixing Unwanted Required Minimum Distributions

As noted at the beginning of this article, the CARES Act was signed into law on March 27, 2020… nearly a quarter of the way through 2020. Accordingly, by the time its relief on RMDs was brought to life, many retirees had already taken what they believed to be their obligated RMD for 2020.

Thus, while the ability to avoid a Required Minimum Distribution for 2020 comes as welcome news for many affluent retirees, for others, the relief provided by the CARES Act may have come too late for an RMD already taken.

Fortunately, the reality is that there will be at least some cases where such ‘unwanted’ RMDs can be fixed. Although unfortunately, not all unwanted RMDs may be fixed (e.g., by rolling them back into an eligible retirement account), and other complications, such as the once-per-year rollover rule, may also limit or eliminate any benefits of the relief.

On the other hand, spousal beneficiaries of inherited retirement accounts may be able to fix unwanted RMDs… though non-spouse beneficiaries will have no options to fix unwanted RMDs.

Fixing Unwanted Lifetime Required Minimum Distributions (RMDs) From IRAs And Employer-Sponsored Retirement Plans

Individuals who are participants in employer-sponsored retirement plans (e.g., 401(k), 403(b), etc.) or any type of IRA (including individual IRAs, and also SEP and SIMPLE IRAs) may have a number of different ways in which they can try to fix unwanted RMDs. These methods include:

• Use the 60-Day Rollover Window. The simplest way to fix an unwanted RMD taken from an IRA or employer-sponsored retirement plan is to catch the ‘mistake’ during the 60-day rollover window.

As notably, while RMDs are not eligible for rollover, non-RMD distributions, that were thought to be an RMD at the time of distribution, are essentially retroactively ‘un-required’ by the CARES Act.

Thus, such amounts would be eligible for rollover, either back to the same account from which they were distributed, or to another eligible retirement account, such as an IRA, because they turned out (albeit after the fact) to not have been RMDs in the first place.

Given the short time-frame involved with this strategy, though, every day that passes matters here. Fortunately, though, it’s important to realize that the 60-day rollover window does not begin until a taxpayer actually receives their distribution, with ‘Day 1’ being the day after receipt. (Which may add a few days to the window beyond whenever the original RMD request was made.)

On the other hand, IRA owners must be mindful of the once-per-year IRA rollover rule (discussed further below); however, since the once-per-year rollover rule does not apply to distributions from non-IRA-based employer-sponsored retirement plans, any number of distributions meant to satisfy an ‘RMD’, and received by a taxpayer within the past 60 days, may be rolled over to an eligible account before the end of the 60-day rollover window.

• Use the Relief Provided By Notice 2020-23. On April 9, 2020, the IRS issued Notice 2020-23 to provide taxpayers with additional relief from deadlines due to the COVID-19 crisis. The headline of the relief, for many, was the pushing back of Q2 2020 estimated tax payments to July 15, 2020 (to match the 2019 tax filing and Q1 2020 estimated tax payment deadline).

But towards the end of Section A of the Notice, the IRS cracked open the RMD relief door for a few additional taxpayers by allowing those individuals with distributions outside of the 60-day window, but taken as far back as February 1, 2020, to be rolled over until as late as July 15, 2020.

More specifically, Section A of Notice 2020-23 reads, in part:

The Secretary of the Treasury has also determined that any person performing a time-sensitive action listed in either § 301.7508A-1(c)(1)(iv) – (vi) of the Procedure and Administration Regulations or Revenue Procedure 2018-58, 2018-50 IRB 990 (December 10, 2018), which is due to be performed on or after April 1, 2020, and before July 15, 2020 (Specified Time-Sensitive Action), is an Affected Taxpayer.

Interestingly, extending the rollover deadline is covered rather simply in Treasury Regulation § 301.7508A-1(c)(1)(iii) – which is not listed above. However, Revenue Procedure 2018-58, which is also referenced, does grant relief for rollover contributions.

As such, in what seems to be a far more complicated than necessary way of doing so, IRS Notice 2020-23 extends the rollover deadline for any distributions that would have needed to be completed between April 1, 2020, and July 14, 2020, to July 15, 2020.

Accordingly, distributions taken as far back as February 1, 2020 (60 days prior to April 1, 2020) can be rolled over until as late as July 15, 2020.

• Use The Coronavirus-Related Distribution Provision of the CARES Act. Section 2202(a) of the CARES Act creates a special type of distribution, known as a “Coronavirus-Related Distribution” that can be used by individuals who have been directly affected by the COVID-19 virus. These distributions can be up to $100,000 and can be made from IRAs, employer-sponsored retirement plans, or a combination of both, and must be made in 2020 by an individual who has been impacted by the Coronavirus.

In order to qualify for such a distribution, a taxpayer, their spouse, or a dependent must be diagnosed as COVID-19 positive, or they must be experiencing financial hardship due to being quarantined, furloughed, being laid off, unable to work because of a lack of childcare options, having hours reduced, or being a business owner who has needed to close or partially shut down operations. In addition, the CARES Act also authorizes the IRS to extend the relief to others it sees fit to do so for.

Coronavirus-Related Distributions offer several benefits, but of particular interest to individuals looking to rollover RMDs taken early in 2020 (and thus, outside of both the 60-day rollover window, as well as the relief provided by IRS Notice 2020-23) is that Coronavirus-Related Distributions may be rolled over to another retirement account for up to three years(!) after the distribution has been received.

Furthermore, unlike most provisions of the CARES Act, the relief provided by Coronavirus-Related Distributions extends all the way back to January 1, 2020... before the Coronavirus was a significant factor in any U.S. location.

It’s possible that, at some point, the IRS could provide some sort of blanket relief, allowing everyone to use a Coronavirus-Related Distribution, in the same manner as it extended the tax filing deadline for everyone. However, given the extent of the COVID-19 crisis and the corresponding economic impacts, many taxpayers will already be able to have distributions qualify for such status.

Critically, there is nothing in the language of the CARES Act that would prevent an individual from treating an early-year RMD as a Coronavirus-Related Distribution if, at any point during 2020, they are diagnosed with the illness or qualify due to financial hardship. And since the CARES Act allows distributions to be retroactively treated as a Coronavirus-Related Distribution all the way back to January 1, 2020, if an individual is able to qualify for such a distribution by experiencing one of the qualifying events (listed above) anytime in 2020, it would ‘magically’ change the deadline to rollover that distribution from 60 days after it was received, to three years after it was received!

Example #4: Cynthia is a 74-year-old IRA owner who took what she believed to be her 2020 IRA RMD in January of 2020. Fortunately, Cynthia is in excellent financial shape and does not need (or want) to take any money out of her IRA.

Upon hearing about the RMD relief in the CARES Act, Cynthia called her advisor to see if she could roll back the RMD. She’s told that she cannot do so; because she took her RMD in January 2020, neither the 60-day rollover rule nor the relief provided under Notice 2020-23 would allow her to roll back that amount in a timely manner.

Suppose, however, that in August 2020, Cynthia is diagnosed with COVID-19. As a result of that diagnosis, Cynthia can (retroactively) classify her January 2020 distribution as a Coronavirus-Related Distribution. In doing so, the rollover deadline for that distribution becomes three years from the date of receipt, thus allowing her to replace the would-be RMD in her account to avoid taxation of the distribution.

• Relief Via Revenue Procedure 2016-47. Another potential option for those who miss the 60-day deadline to timely rollover an unwanted RMD is to self-certify a late 60-day rollover via IRS Revenue Procedure 2016-47. Under this guidance, taxpayers have the ability to 'allow themselves' to complete a 60-day rollover after the expiration of the 60-day rollover window.

To qualify for such relief, the reason that the rollover was not completed in a timely manner must be one of 11 approved 'excuses' outlined by the IRS in the Revenue Procedure. Furthermore, the rollover must be completed "as soon as practicable" (with a 30-day safe harbor) after the 'excuse' no longer impairs the ability to do so.

Unfortunately, for many individuals, none of the IRS-listed 'excuses' will apply here (as there's no built-in excuse for "If Congress changes the law mid-year and eliminates RMDs"). In other instances, the potential excuse, such as being ill, may not actually provide any more relief than is available via other means. For example, if an individual, their spouse, or a dependent was diagnosed with COVID-19, they can already rollback the distribution for up to three years as a Coronavirus-Related Distribution.

Nevertheless, if someone had some other health event in recent months - for instance, a non-COVID illness for themselves or a family member - that prevented them from engaging in a rollover of their unwanted RMD, relief under Revenue Procedure 2016-47 may still be available. Note that Revenue Procedure 2016-47 does not provide relief for the once-per-year rollover rule.

Nerd Note: In addition to the possible solutions outlined above, the 60-day-rollover window may also be extended via IRS approval in a private letter ruling (PLR). Historically, however, the IRS has not granted such requests when a taxpayer did not have an intent to rollover the amount at the time the distribution was taken. Here, taxpayers thinking that they were taking an RMD could not have possibly had an intent to roll over such amounts, because RMDs are ineligible for rollover in the first place! But even if the IRS was able to 'see past' its previous stance in light of the unusual situation, a PLR still comes with a $10,000 price tag... and that's just the IRS fee! Add in professional costs to prepare and you're looking at an easy $15,000 - $20,000 tax bill! It would take a really, really big RMD to justify that sort of cost (and, no less, with no guarantee of success!).

• Hope For Future Relief. If none of the various options for relief discussed above apply to a taxpayer, there is one more thing that can be done... wait and hope (OK, maybe that's two things). It is highly likely that, at some point, the IRS will issue further guidance and grant additional relief regarding the rolling back of unwanted RMDs.

For instance, in 2009, the last time that RMDs were suspended, the IRS issued Notice 2009-82 in September (of 2009) allowing unwanted RMD distributions taken earlier in the year to be rolled back as late as November 30, 2009. And notably, there was even less reason to issue such guidance then, as the law that suspended RMDs for 2009 was passed in (late December, but still) 2008!

It's important to realize, though, that even if such relief is granted at some point in the future, it will not help mitigate once-per-year-rollover-rule issues, as discussed below. That sort of relief is something that only Congress can provide, via legislation.

Once-Per-Year Rollover Limitations To Fixing Unwanted Lifetime Required Minimum Distributions (RMDs) From IRAs (Including SEP And SIMPLE IRAs)

IRA owners who took their would-have-been RMD early in 2020 and who now would like to replace it have the aforementioned tools available to them, including using a 60-day rollover, the relief provided by IRS Notice 2020-23, or a Coronavirus-Related Distribution to fix an unwanted RMD.

IRA owners, however, have an additional hurdle to overcome in order to be able to roll back their RMD. More specifically, IRA owners have to be mindful of the once-per-year IRA rollover rule, which limits an individual to only one IRA-to-IRA or Roth IRA-to-Roth IRA 60-day rollover to be completed in any 365-day period.

Neither the regular 60-day rollover rules, nor the relief provided by IRS in Notice 2020-23 offers any relief from the once-per-year rollover rule. Thus, an individual who took an early-2020 distribution that they believed at the time to be an RMD, and who also completed a 60-day IRA-to-IRA or Roth IRA-to-Roth IRA rollover within the past 365 days, would be unable to complete another IRA-to-IRA rollover now using either the ‘regular’ 60-day rollover rule or the relief under Notice 2020-23.

Accordingly, the once-per-year rollover rule also creates unique problems for individuals who take their RMD monthly (or in other regular installments). Due to the once-per-year rollover rule, at best (assuming no other 60-day rollover within the past year), only one such distribution would be able to be rolled back IRA using the 60-day rule or relief under Notice 2020-23. In other words, they may be able to roll over their first (e.g., January) monthly now-no-longer-an-RMD, but doing so would trigger the once-per-year rollover rule, rendering them ineligible to roll over their February now-no-longer-an-RMD distribution, or their March distribution, etc.

IRA RMD Solutions That Avoid Once-Per-Year Rollover Rule Issues

While the once-per-year rollover rule puts a big dent in the ability for many IRA owners to return unwanted RMDs, for those individuals who may find themselves faced with such a dilemma, there are still possible solutions to consider. Such options include:

• Rollover IRA Distributions Into An Employer-Sponsored Retirement Plan. If an individual has a non-IRA-based employer-sponsored retirement plan that accepts roll-ins (plans do not have to allow such transactions), the ‘regular’ 60-day rollover window or the relief provided by Notice 2020-23 can be used to roll an unwanted IRA ‘RMD’ to the plan. IRA-to-plan rollovers are not subject to the once-per-year rollover rule (only IRA-to-IRA rollovers).
• Use A Coronavirus-Related Distribution. While regular IRA-to-IRA 60-day rollovers and rollovers completed using the relief under Notice 2020-23 are both subject to the once-per-year rollover rule, Coronavirus-Related Distributions do not have the same restrictions. More specifically, the CARES Act treats Coronavirus-Related Distributions rolled back into accounts as though the rollover was completed in a trustee-to-trustee manner.

Thus, in the event an IRA owner qualifies to treat a distribution in such a manner, they should be able to replace any unwanted IRA ‘RMD’ amounts (up to the $100,000 limit for Coronavirus-Related Distributions) in an IRA before the end of the three-year rollover deadline without once-per-year rollover complications.

• Make A Roth Conversion. For IRA owners dealing with once-per-year rollover rule issues, and who don’t have a non-IRA-based plan available to which to rollover unwanted RMD distributions, another option to consider is to make a Roth IRA conversion of the distributions considered as ‘un-rollover-able’-back-to-a-Traditional IRA.

Notably, Roth IRA conversions are not subject to the once-per-year rollover rule!

Granted, such distributions will be taxable… but hey, they were going to be taxable anyway, right!? At least this way, the future growth on those amounts have the opportunity to be tax-free!

Of course, while the Roth conversion option does help an individual get around the once-per-year rollover issue, it does not change the timeframe for which such a rollover (the IRA-to-Roth IRA rollover/conversion) must be completed. Therefore, such conversions must generally be completed during the 60-day rollover window, unless the relief provided under Notice 2020-23 applies (in which case, the conversion may be completed until as late as July 15, 2020).

Unwanted RMDs Of Non-Spouse Beneficiaries Cannot Be Fixed

Retirement account owners who have taken unwanted ‘RMDs’ have, as discussed above, a number of potential options that may be used in order to fix those distributions. Unfortunately, the same cannot be said for non-spouse beneficiaries of both IRAs and employer plans.

Notably, non-spouse beneficiaries of inherited retirement accounts are not eligible to do a rollover. Period.

As such, extending the time period during which a rollover can be completed, such as via Notice 2020-23, is of no help to non-spouse beneficiaries, as they are ineligible even to do a rollover in the first place!

What about spousal beneficiaries?

While such beneficiaries are rarely subject to RMDs, they do exist in limited circumstances. And in such circumstances, a spouse-beneficiary of an IRA or employer-sponsored retirement plan can rollover the distributions to their own retirement account, in what is known as a spousal rollover. Such distributions are, however, subject to the ‘normal’ rollover rules, including both the 60-day rollover rule (along with any relief may available, such as Notice 2020-23), as well as the once-per-year rollover rule for IRAs.

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The CARES Act provides much-needed relief for millions of Americans who are struggling and dealing with the financial fallout of the COVID-19 crisis. But while the primary purpose of the CARES Act is to extend relief to the needy, it also includes relief for those at the other end of the spectrum.

More specifically, the CARES Act suspends required minimum distributions in 2020 from IRAs and defined contribution employer-sponsored retirement plans. Clearly, clients whose goal is to avoid taking distributions from an account, especially at a time like this, are pretty fortunate.

Nevertheless, for those who are fortunate enough to be able to meet living expenses without retirement dollars, the CARES Act may help them to avoid taking distributions from their account at depressed values. For others, it might allow them to convert more of their account to a Roth IRA in a tax-efficient manner than would otherwise be possible. While for still others, it will simply enable them to minimize taxable income in a year when additional income (for expenses such as vacations, eating out, etc.) may not be necessary.

Of course, some individuals who would have liked to have taken advantage of this relief may have taken what they believed to be an RMD before the CARES Act was enacted into law (or simply before they learned that they did not have to take such a distribution). Thankfully, in many of those situations, prompt action now will allow those unwanted distributions to be fixed by rolling them back into another account.

Ultimately, the key point is that for retirement account owners and beneficiaries fortunate enough to be able to avoid taking distributions from their retirement accounts, the CARES Act provides them a path to do so for 2020. And for those who need to or want to continue taking distributions, the door is always open.