Executive Summary
In response to the coronavirus global pandemic, Congress passed the Coronavirus Aid, Relief, and Economic Security (CARES) Act in March 2020. A more-than-$2-trillion-emergency fiscal stimulus package, the CARES Act was enacted to ease the effects of the economic damage caused by the COVID-19 pandemic by providing a wide range of relief efforts to help individuals, businesses, healthcare entities, and state and local governments meet short-term cashflow demands. Among the many provisions provided by the CARES Act was the suspension of Required Minimum Distributions (RMDs) during 2020. But since the CARES Act wasn’t passed until March 27, 2020, many individuals had already taken what they thought, at the time, were their 2020 RMDs!
Not surprisingly, many of those retirement account owners and beneficiaries wanted to ‘undo’ those distributions that were no longer RMDs and put them back into a retirement account. For some retirement account owners, that was possible by making a 60-day rollover. But for retirement account owners whose 60-day rollover window had already closed (including the extended window for distributions made on or after February 1, 2020 by IRS Notice 2020-23), or where such rollovers would have been a violation of the once-per-year rollover rule, or where distributions were made to non-spouse beneficiaries, there appeared to be no way to ‘unring’ the RMD ‘bell’.
Cue IRS Notice 2020-51…
On June 23rd, the IRS released “Guidance on Waiver of 2020 Required Minimum Distributions” (Notice 2020-51), which ultimately solved all the problems noted above, allowing anyone who took a distribution (that, but for the CARES Act, would have been a RMD) to rollover that amount until August 31, 2020 .
While the IRS released Notice 2020-23 in April 2020, which extended the 6o-day rollover rule for distributions taken on or after February 1, 2020 to the later of 60 days after receipt of the distribution or July 15, 2020, individuals who took distributions prior to February 1 were excluded from the opportunity and were still unable to rollover their unwanted distributions. Notice 2020-51 provides even further 60-day rollover relief, by extending the 60-day-rollover window for all unwanted 2020 RMD distributions to the later August 31, 2020 date or 60 days after receipt of the distribution).
Notice 2020-51 provides further relief by excluding rollovers of amounts, that if not for the CARES Act would have been 2020 RMDs, from being counted as a rollover for purposes of the once-per-year rollover rule. Finally, while beneficiaries are explicitly prohibited from completing 60-day rollovers under the law, Notice 2020-51 essentially allows beneficiaries to temporarily ignore this portion of the Internal Revenue Code and rollover their 2020 inherited ‘RMDs’ until as late as 8/31/2020.
Ultimately, the new guidance just released by the IRS provides a fair and favorable outcome for people who took their RMDs earlier this year, as those individuals should not be penalized for being proactive and complying with the RMD rules early during the year. However, this is an unprecedented and potentially troubling move by the IRS, given that they do not actually have the legal authority to make this change (it is technically the job of Congress to create and amend laws). The IRS’s action can arguably be interpreted as circumventing well-defined statutes prescribed by the Tax Code, Tax Court decisions, and its own long-standing guidance via Private Letter Rulings (PLRs). While it’s unlikely that anyone will take issue with the IRS’ attempt to be fair and equitable, there’s little question that they seriously stretched their legal authority when issuing this Notice, which may set a troubling precedent moving forward.
Show Notes
- CARES Act (Congressional Bill HR 748)
- IRS Guidance on Waiver of 2020 Required Minimum Distributions (Notice 2020-51)
- IRS Update to Notice 2020-18, Additional Relief for Taxpayers Affected by Ongoing Coronavirus Disease 2019 Pandemic (Notice 2020-23)
- Analyzing The CARES Act: From Rebate Checks To Small Business Relief For The Coronavirus Pandemic
- Fixing Unwanted RMDs Taken Before The CARES Act Waiver Of 2020 RMDs
- Understanding The New Once-Per-Year 60-Day Rollover Rules For IRAs And The Exclusion For Trustee-To-Trustee Transfers
- Is There Really Much Value to Suspending 2009 RMDs?
#OfficeHours with Nerd's Eye View Video Transcript
Welcome to this episode of Office Hours. My name is Jeffrey Levine, the Lead Financial Planning Nerd for Kitces.com, and also the Director of Advanced Planning for Buckingham Wealth Partners. Thanks so much for taking a few moments to spend your evening here, talking about nerdy tax stuff.
In particular today, we're going to focus on the guidance that was released today by the IRS, giving really unprecedented Required Minimum Distribution (RMD) relief. And when I say unprecedented, I truly mean this is an unprecedented amount of relief from the IRS, with respect to any Required Minimum Distributions ever, and with respect to any rollovers ever. And we'll talk about why that is in just a minute.
How The CARES Act Originally Eliminated RMDs From Most Retirement Accounts [00:01:32]
But as a frame of reference, if you're not sure what I'm talking about here, perhaps you've been living under that proverbial rock for the last few months. Section 2203 of the CARES Act law that was passed earlier this year on March 27, eliminated Required Minimum Distributions from IRAs and other sorts of defined contribution accounts. So things like IRAs, 401(k)s, 403(b)s, 457(b) plans that were governmental plans, etc., as well as for beneficiaries of any of those types of accounts. So really, this was broad relief from Congress under the CARES Act.
The problem for some people, though, was that the CARES Act was passed on March 27th of this year. That's almost one-quarter of the way through this year and so, naturally, a lot of people have already started to take their Required Minimum Distributions, either in one lump sum, or perhaps they had taken them in monthly amounts, or perhaps they just didn't realize that this law had been passed and they forgot to stop an already scheduled RMD or their custodian wasn't able to process it in time.
So, ultimately, what happens is people receive dollars from their retirement account that they don't want, that they want to keep in there. They wanted not to take their RMD, but they already took it.
Now, in general, you cannot roll over a Required Minimum Distribution. But when the CARES Act eliminated Required Minimum Distributions for 2020, all of a sudden those distributions that happened earlier this year were suddenly not actually RMDs anymore, right? They were no longer actually Required Minimum Distributions. They were retroactively changed and so, all of a sudden, they became rollover-eligible.
Extension of the 60-Day Rollover Window Allowed For (Some – But Not All) Early 2020 Distributions To Be Rolled Over [00:03:23]
The problem, though, of course, was that by the time the CARES Act happened and this information was disseminated, for the client, many of them had already passed that 60-day rollover window, and so they were not eligible to put those dollars back into another account.
So the IRS tried to address some of that earlier this year in Notice 2020-23, where they extended the rollover window for individuals who had taken distributions from their IRA or other types of plan. And they said, "You know what, you can actually roll over those distributions, not just for 60 days, but we'll extend the 60-day window up until July 15th of this year."
And that goes for any distribution taken on February 1st of this year or later, which was great for a lot of people but still left us unsatisfied in a lot of ways. For instance, even after Notice 2020-23, there wasn't a broad relief for individuals who took RMDs in January.
In other words, those individuals who were the most proactive, who were following the IRS rules, as well the Congress' rules as quickly as they could and being proactive in getting those RMDs out early in the year were the ones who were penalized the most. So it was January RMDs that were still lacking and there were two other critical issues that might have prevented individuals from rolling over their RMD taken earlier this year, notably the once-per-year rollover rule.
Now, the once-per-year rollover rule is a rule that says you can do no more than one IRA-to-IRA or Roth IRA-to-Roth IRA 60-day rollover in a year. And when we're talking about a year here, we're talking about a 365-day period. So, for argument’s sake, say somebody who took a distribution in January, and then another partial in February, and then another partial in March; if those distributions came from a traditional IRA, they couldn't all go back to a traditional IRA because it would have been a violation of the once-per-year rollover rule, even if you happened to catch multiple distributions within that 60-day window.
And Notice 2020-23, the relief that came out in April, did nothing to address that. Frankly, that wasn't a surprise to any tax practitioners or retirement specialists out there because the IRS has once said that it doesn't have the authority to give relief for the once-per-year rollover rule. That has been the IRS's position for years.
In fact, in many Private Letter Rulings and other ways in which taxpayers have received guidance, from the IRS, the IRS has said, "We're sorry. We can do certain things like give you an extension on the 60 days because we're explicitly authorized to do that under the law, but we can't help you out with the once-per-year rollover rule because we have no mechanism under current law to do that." Well, maybe not anymore. We'll see. We'll talk about that in a moment.
The third issue that was still existing – so we had January RMDs that were still a problem. People who were stuck dealing with the once-per-year rollover rule and then, the third category was beneficiaries because non-spouse beneficiaries cannot do a rollover. It says that right in the Tax Code. It's very clear. It says, "Non-spouse beneficiaries," not of course in these exact words, but it says in no uncertain terms, "Non-spouse beneficiaries cannot do rollovers at all." Period. End of story.
IRS Now Allows All 2020 RMDs To Be Rolled Over Through Notice 2020-51, In A Move That Perhaps Stretches Their Legal Authority…? [00:06:53]
Well, today's Notice resolves all of these issues for people who took RMDs earlier this year. More specifically, Notice 2020-51, again, released earlier today, and if you want to pull the actual Notice, I have a tweet straight earlier where I linked to it. The Notice says that all of these RMDs that were taken earlier in 2020 can actually be rolled over now until, at the latest, August 31st of this year. So you have until the end of August to roll over any unwanted RMD that was eliminated by the CARES Act.
That includes any RMDs that were taken in January. It includes any Required Minimum Distributions that were taken by beneficiaries. It includes any Required Minimum Distributions that if rolled back would have otherwise violated the once-per-year rollover rule. All of these issues have been just...they're no longer. Poof.
IRS says don't worry about them, which in theory sounds great, right? But there is a troubling side of this that we do have to reckon with. And that's that the IRS here is not only going against the law; it's very clear that the statute does not give the IRS the authority to give people relief from the once-per-year rollover rule. It's very clear that there's no mechanism in the law to allow the IRS to allow beneficiaries to rollover distributions.
So we have a very slippery slope here, right? It's good in this case because it’s the fair outcome. Individuals who took RMDs proactively in January should not be penalized versus the people who delay until the last minute and drive all of us crazy every year and call up on December 30th and say, "Hey, I've got to take my RMD." Right? That's not really fair to disadvantage those individuals.
But, at the same time, if we are to just to say the IRS, "Well, you could do whatever you want. It doesn't matter what the law says as long as we get to the right outcome." That can be very problematic when what you believe the right outcome is and what the IRS believes the right outcome is don't align.
Now, I think here, we got to a point where the IRS said, "Look. We want to give everybody relief. No one's going to fight people over this or sue us and take us to tax court over giving people relief." A lot of people put RMDs back into their accounts. No one's fighting to stop the 75- and 85-year-old people putting back the RMDs into their account.
But nevertheless, the way the IRS is choosing to do this is very troubling for a lot of us who have watched the IRS repeatedly deny taxpayers in Private Letter Rulings over the years, who have looked at other IRS guidance and were... Even back in 2008, when they suspended RMDs for 2009, they did it proactively for the following year; there was no mechanism to fix unwanted RMDs for beneficiaries as there was for owners because the IRS said, at that time, "We don't think we can do this without actual legislative action."
So I think it's fair to point out that we're on a very slippery slope here. Hopefully, this is one of the few times that it's just in pandemic-mode where the IRS has chosen to do this, but it is worth noting that it's really questionable, the legal authority on which the IRS has chosen to move forward with this guidance.
Any Distributions Taken In 2020 Are No Longer Subject to the Once-Per-Year Rollover Rule And Can Be Rolled Over Before August 31st [00:10:23]
With that said, let's just take a few frequently asked questions that I've received today. And probably the first one or the most common one, I think about seven or eight people either emailed me or pinged me on Twitter and said, "Hey Jeff, what if we took monthly distributions? Does this now mean we can put back all of those monthly distributions?" And the answer is yes. You can do whatever you want. You can now take all of those monthly distributions, package them up, and roll them back over in one giant check as long as it's before August 31st. If your client doesn't have the full amount now but maybe they will by August 31st, they can also put it back in multiple amounts. Those rollovers will not count for purposes of the once-per-year rollover rule.
Another question that's been asked a lot today is, "So Jeff, does this mean that the IRS is now saying there is no more once-per-year rollover rule and that they're suspending it because of COVID-19?" No, that is not what this is saying. What this is saying is that the RMDs that were taken earlier this year (and I really shouldn't say the RMDs because they're really not RMDs anymore; they were waived by the CARES Act), but any amount that was taken earlier this year, or even now, that would have been a Required Minimum Distribution but for the passing of the CARES Act, any rollovers of those amounts, and those amounts specifically, are not going to be subject to the once-per-year rollover rule.
The Importance of Notifying Clients Of The New Ruling And Documenting Calculated RMDs For All Clients [00:11:51]
So if you have a client that is going to be completing these rollovers, what should you do now? Well, first off, you want to get this information out to clients as quickly as possible. Many of us expected a more broad IRS relief than we saw earlier this year with respect to Required Minimum Distributions, notably a later deadline. But I don't think anybody thought that we would get relief for beneficiaries and on the once-per-year rollover rule without Congressional action. So getting this message out to your clients, particularly the beneficiaries, who you probably told, "I'm sorry. You're up the proverbial creek without a paddle," because that's what the rule was, up until today or earlier this afternoon. So you want to get this message out to those beneficiaries, to the other clients.
In addition to just simply getting the message out, I would make sure that you retain some sort of documentation over what their Required Minimum Distribution was calculated to be this year. This way, if the IRS ever asks and says, "Hey, this is actually a violation of the once-per-year rollover rule, etc." You can say, "No, actually under Notice 2020-51, you said we could put these amounts back, and here's the total that we were able to put back. And that's what we did." So I would keep documentation of that.
And, finally, once the money goes back to the custodian, I would just make sure that in the memo line, you write “Rollover Contribution”. Make it clear that it's a rollover contribution. A lot of people have also asked me this, "Jeff, what do we do if the custodian doesn't want to take the dollars back?" Well, if it's a plan, the plan doesn't have to accept roll-ins. But if that's the case, then just roll it to an IRA and if you took it out of an IRA in the first place, roll it back to the IRA. The IRA custodian is not the rollover police. They're not there saying, "No, you..." Just tell them and say, "Rollover contribution." And they should accept it, really, with no questions asked. At the end of the day, it's up to you, and your client, and your client's tax preparer to report that amount as a rollover on their return.
Again, that's the big news. The big takeaway here is that any RMD that was eliminated by the CARES Act earlier this year, including for beneficiaries, can now be returned to an IRA or other retirement account, without any worry about the 60-day rollover rule (as long as it's done by August 31st), without concern about the once-per-year rollover rule, and without concern about being from a beneficiary. So, mega-news from the IRS today; important to get that to your clients.
Again, thanks for taking a few moments to join me tonight and talk about this relief. I wish you and your family, your loved ones, a wonderful, healthy remainder of 2020. Take care, everyone.
I read the IRS document and am a bit lost….
In January, I took an RMD payment + a bit extra (about $500) from an Inherited IRA from my Mother. She passed in 2016 and I have been taking RMDs since 2017.
Am I correct that I can choose to roll the entire distribution back into the Inherited IRA?
Or am I only allowed to roll back the RMD portion itself
Hi Joel!
Only the amount that would have been a 2020 RMD, if not for the CARES Act, can be returned by the August 31, 2020 deadline.
From the Notice [emphasis added]
“Permitted repayments of RMDs previously distributed from an IRA. In the case of an IRA owner or beneficiary who has already received a distribution of an amount that would have been an RMD in 2020 but for section 2203 of the CARES Act or section 114 of the SECURE Act, the recipient may repay the distribution to the distributing IRA, even if the repayment is made more than 60 days after the distribution, provided the repayment is made no later than August 31, 2020. The repayment will be treated as a rollover for purposes of § 408(d)(3) of the Code, but will not be treated as a rollover for purposes of the one rollover per 12-month period limitation in § 408(d)(3)(B) and the restriction on rollovers for nonspousal beneficiaries in § 408(d)(3)(C).”
Hope this helps.
Best!
Thanks! Appreciate the clarification
Hi Jeff,
But amounts in excess of the RMD amount can still be returned by July 15th since the 60-day window was extended until then. Is that correct?
-Zach
I am not old enough for a RMD. I did a conversion from my IRA to Roth in early January, all in stock. The value of the stock has tanked. Can I reverse the conversion? (the old Do-Over Rule) so I don’t owe taxes on my bad timing?
Hey William,
Sorry to be the bearer of bad news, but there’s nothing in the CARES Act, any other legislation, or any other IRS guidance, that would allow you to recharacterize your January 2020 conversion.
Going forward, to minimize the possibility of a similar situation, you could consider converting throughout the year in what I like to think of as “Roth-Conversion-Cost-Averaging”. I discussed the strategy at length here https://www.kitces.com/blog/2018-roth-ira-conversion-planning-tcja-conversion-cost-averaging-barbell/
All the best!
I am still not clear on one thing…does this RMD waiver now apply to ALL inherited IRAs (non-spouse) such that these can also be returned?
To the extent that the amount have already been distributed from those account this year, and to the extent the distributions would have been RMDs, if not for the CARES Act, then yes, those amount CAN be returned to a non-spouse beneficiary IRA by August 31, 2020.
I have clients who did a QCD and took remaining RMD in January. If they pay back the RMD they personally took, what happens to the QCD? Is that still a tax free charitable donation? They take the standard deduction. Thx.
Hi Kim!
Thanks for reading and for your question. The amount of a QCD that a person makes is NOT limited by their RMD. Rather, a QCD can be made up to $100k, regardless of the RMD amount.
As such, your clients have the ability (but not the obligation) to pay back any amount of their 2020 distributions that would have been an RMD, if not for the CARES Act. So, if your client only pays back the portion of their ‘RMD’ in excess of the QCD amount, they will have $0 of taxable income this year, and will continue to have a valid QCD.
Hope this helps.
Best!
Thanks so much for clarifying, you’re the best!!
Jeff,
An excellent article. Thanks. To help allay your concerns, though, the IRS did the same thing back in 2000 when they issued the previous RMD rules. Those in no way reflected the law passed by Congress, but what Congress had passed was so completely unenforceable and so filled with traps for the unwary, that the IRS set forth rules that in every possible situation reflected the most taxpayer friendly outcome, so no one could complain and if no one complains, they (and you and I for that matter) can do whatever they want. If they tried it in a less taxpayer friendly manner and complaints arose, those complaints could always be brought before the courts.
Thanks for the kinds words and for the great ‘color commentary’ here! Really appreciate it!
Thank you Jeff. Good stuff!
In the event that an non-spousal, inherited IRA beneficiary took out their RMD in January, and withheld taxes to the IRS in the process; let’s say the RMD was $7,000 and they preemptively withheld 20% ($1,400) in taxes and sent the net $5,600 to their non-qualified account for reinvestment.
Then they subsequently opted to roll the entire $7,000 original RMD back into the inherited IRA from that non-qualified account, I assume those preemptively withheld taxes will simply serve as an “estimated tax payment” to be reconciled when they complete their 2020 taxes? Thanks!
Ryan,
Essentially, yes. But it’s not an estimated tax payment. It’s withholding. Both count towards taxes paid, but withholding are treated as being paid in ratably throughout the year.
Best!
@jefflevinecpacfp:disqus , so from a tax compliance standpoint, this would be a $7,000 distribution on Form 1099-R, a rollover contribution on Form 5498 of $7,000 (resulting in no taxable distribution) with the $1,400 still coming through as withholding on Form 1099-R?
Thanks for the video and write up – great stuff as always!
I have an interesting scenario from a new client:
– Husband died in Jan 2020. His surviving wife was the sole beneficiary, hadn’t settled the account yet.
– RMDs were auto-paying monthly out of the deceased IRA.
– Wife just settled IRA to her name at other custodian.
– Hired me this week. Could we return RMDs distributed while in husbands name to her new IRA in her name?
Hello jeff,
Thank you for the detailed explanation. Very welcome and appreciated!
I have a client with an inherited IRA who is using the 5-year rule for distributions. We already made the distribution for 2020. Are we allowed to roll this back into the inherited IRA? Asking since this is not a RMD, just a distribution.
Thank you,
Anandi
Note: May have sent this in twice. I got lost in the Disqus verification the first time around.
Anandi
That’s a good point. Those withdrawing from inherited IRA under the 5 or 10 year rule, really don’t have an RMD until the final year. So does this mean any elective withdrawals during this period will be subject to the one-per-year rollover rule?
Thanks Jeff!
I am probably missing a detail, but it seems that this opens the door to a strategy reminiscent of the conversion re-characterization strategies, but with a shorter horizon. Could someone divide up their IRA into multiple distributions in-kind, wait until late August to see which have gone up in value, roll those into a Roth account in-kind (paying tax only on the initial distribution value), and roll the “losers” back to the IRA? I realize you could do this prior to 2020-23, but you were limited to the once-per-365 days roll back to the IRA before.
I will turn 70 1/2 in Sept 2020 so a distribution I took in January would seem to not be an RMD and thus not eligible for repayment. But 2020-51 seems to allow eligibility by saying this would have been an RMD except for Secure Act section 114 and in that case is eligible for repayment. Am I interpreting this correctly?
If I have a client that had a required minimum distribution of $20,000 and withheld $5,000 for taxes, and therefore netted $15,000 in his bank account, in order to reverse the distribution, does he need to return $15,000 or the full $20,000 and expect the $5,000 to be refunded via his 2020 tax return?
Can you take a partial RMD distribution in 2020 under this waiver?
Can you take a partial RMD distribution under this waiver?
I received RMD for Jan & Feb and returned them in March. My 1099-R shows the amount of the two distributions received, but has not been adjusted for the returned RMD. I was told the returned RMD will be shown on form 5498, however that form is usually received around April-May. What would be the best way to report this on my taxes?
I have same question as Mike in how to show rollback of 2020 RMD except I use TurboTax. Do you know if they will have accounted for this action in their software?
Hey Mike, check out IRS instructions for filing out lines 4a and 4b as I believe this explains how to account for returning RMD. I also believe this is confirmed to IRS when your custodian files form 5498 after 4/15/2021.
Had RMD in Jan 2020. Didn’t use any of it but also did not roll it backk into IRA as I was unaware that I could do that. Had covid in october. Can I now roll RMD back into IRA as it will reduce my tax bracket if I am able to do such under the cares act or is the Aug 31 date set in stone.