Complications To Undoing Unwanted 2020 RMDs From The “Same-Property Rule” And Other Factors

Author: Jeffrey Levine, CPA/PFS, CFP®, AIF, CWS®, MSA

Team Kitces

Jeffrey Levine, CPA/PFS, CFP, AIF, CWS, MSA is the Lead Financial Planning Nerd for Kitces.com, a leading online resource for financial planning professionals, and also serves as the Chief Planning Officer for Buckingham Strategic Wealth. In 2020, Jeffrey was named to Investment Advisor Magazine’s IA25, as one of the top 25 voices to turn to during uncertain times. Also in 2020, Jeffrey was named by Financial Advisor Magazine as a Young Advisor to Watch. Jeffrey is a recipient of the Standing Ovation award, presented by the AICPA Financial Planning Division for “exemplary professional achievement in personal financial planning services.” He was also named to the 2017 class of 40 Under 40 by InvestmentNews, which recognizes “accomplishment, contribution to the financial advice industry, leadership and promise for the future.” Jeffrey is the Creator and Program Leader for Savvy IRA Planning®, as well as the Co-Creator and Co-Program Leader for Savvy Tax Planning®, both offered through Horsesmouth, LLC. He is a regular contributor to Forbes.com, as well as numerous industry publications, and is commonly sought after by journalists for his insights. You can follow Jeff on Twitter @CPAPlanner.

Read more of Jeff’s articles here.

Show Notes

• Analyzing The CARES Act: From Rebate Checks To Small Business Relief For The Coronavirus Pandemic
• New Rollover Rules For Unwanted 2020 RMDs Under IRS Notice 2020-51

#OfficeHours with Nerd's Eye View Video Transcript

Tonight, we're going to talk about the CARES Act, and more specifically, the waiver of required minimum distributions. And then, the following guidance from the IRS that, now, has allowed us to roll back required minimum distributions up through the end of this month. There's just a lot of questions that are coming out now, with last-minute client calls saying, "Can I do this?" or "What if this happens?" So, let's talk about that this evening.

Of course, my name is Jeffrey Levine. I am the Lead Financial Planning Nerd for Kitces.com. For those of you who would like a transcript of this video, we'll be posting a transcript on Thursday to the Nerd's Eye View website, along with this video itself.

How The CARES Act Affected Required Minimum Distributions For 2020

Now, by way of background, many of you are aware – if not all of you – that we had the CARES Act. That's the stimulus bill that was passed in March of this year – March 27th to be precise. It included lots of things, such as the PPP loan – the Paycheck Protection Program loan. It included all sorts of relief in terms of health care expenses. But one of the other things it did, was it suspended required minimum distributions for 2020, for both IRAs, as well as for defined contribution plans. So things like 401(k)s, 403(b)s, Thrift Savings Plans, etc. And while it did eliminate RMDs, the problem was it didn't get passed until March 27, right? So you already had individuals who had taken RMDs.

Remember, we're a quarter of the way through the year already. So a number of people already took their required minimum distributions earlier in the year. Similarly, there was a lot going on. If you remember back then, in late March, early April, etc., there was a lot going on. People, in terms of their own protection – staying away from going out, or just busy with watching their own kids at their house, or their grandkids, as it were – so there were lots of reasons – advisors out of the office. So that even if someone realized on March 27th that they no longer had an RMD, it may have been that over the next few weeks, few months, etc., that distributions – perhaps, that were already scheduled – still went out, that now, in retrospect, the individual did not want. So the good news is that the IRS did give us some relief and, in fact, Congress gave us some built-in relief in the CARES Act itself, in the form of a coronavirus-related distribution. And we'll talk about that in just a bit.

IRS Guidance For Undoing Unwanted RMDs

But following the CARES Act, Congress gave us two additional bits of relief. The first came in in the form of Notice 2020-23. In that Notice, the IRS gave us the ability to roll back distributions that were taken from February 1st and on, through July 15th. That was good, but it had a number of problems associated with it. First off, how about those who took distributions in January, right? They were still left out in the cold, so to speak. But also, it didn't help to provide relief for those who were subject to the once-per-year rollover rule that applies to IRA distributions or even for beneficiaries of retirement accounts, such as IRA beneficiaries, 401(k) beneficiaries, etc.

So, following that – later in the year – the IRS came out, and they issued IRS Notice 2020-51. And that is the relief that we're going to spend the most time discussing today because that is the piece of relief that said it specifically was targeted to retirement accounts, and said if you took what would have been an RMD earlier this year – and that's key – if you took what would have been an RMD earlier this year, you can now roll back that RMD up through the end of this month, August – so through August 31st. You can roll back that RMD anytime from January 1^st – if it was taken – on.

Notably, that did a number of things. Not only did it allow for those January distributions that are unwanted now to be rolled back, but more precisely, what it also did was it allowed IRA owners, who would have otherwise been in violation of the once-per-year rollover rule, to roll back those distributions as well. In addition, it allowed beneficiaries to roll back distributions. And that caught a lot of people off guard because it was well-understood – or at least it was well-believed by most experts in this area – that both of those things would require congressional action, which did not occur. And yet, the IRS was able to offer that relief and, certainly, it's not been challenged, as who would want to fight that? But nevertheless, that relief that applied to those distributions taken earlier this year, or those distributions that would have been subject to the once-per-year rollover rule, or those distributions that were for beneficiaries, that relief expires at the end of this month.

That has spurred a lot of last-minute questions with respect to this rollover guidance. So, one of the first is: "What if I miss the deadline?" Now, that's not really great. We've had about two months or so to follow through on this relief, but having said that, if you do miss the deadline, there still may be some potential to roll back additional distributions. Now, the key thing is once the deadline is missed, the regular rules will generally apply. So, for argument's sake, if your distribution is more than 60 days in the past, you are likely going to be unable to roll that distribution back. If your distribution would be a violation of the once-per-year rollover rule – well, after August 31^st – can't do it. If your distribution is from an inherited IRA, or inherited 401(k), or other inherited defined contribution plan, after this month, if you haven't finished that, you're not going to be able to do so.

Classifying Unwanted RMDs As Coronavirus-Related Distributions

And there's only one exception to this rule, and that would be for IRA owners, or 401(k) owners, or retirement account owners – not beneficiaries – who would otherwise be eligible for a coronavirus-related distribution. This is another provision from the CARES Act that said if you were fiscally or physically impacted by the virus – and we'll include a link to a larger article about this if you want more information. But in short, if you were diagnosed, or your spouse was diagnosed, or a dependent was diagnosed with the virus, or if you or a spouse were impacted financially because you lost a job, or you had hours cut back, you had pay cut back, you had to stay home because you had to watch your kids, or that happened to a member of your household, then you're eligible to take what's called the ‘coronavirus-related distribution’. And one of the notable benefits of those distributions is that you can roll back the distribution for up to three years. So presumably, even if you miss the deadline – the August 31st deadline – but your client, let's say, was diagnosed with COVID earlier this year, or now, or even some point later this year – they would be able to take that early year distribution and put it back in as a valid rollover, up through three years from the date of receipt of that distribution. So, that would still be on the table. Of course, that only applies to a relatively small subsection of people. Certainly, given the pandemic, it's not entirely small, but it's still a minority of the retired public, who would otherwise be eligible to put back distributions, right? Again, you need to be diagnosed with the virus or have a fiscal impact as I described.

Now, another question that comes up repeatedly is: "Jeff, I took more than the RMD earlier this year, but now, I'd like to roll that back. Can I do so?" And unfortunately, the answer is no, unless you're within the normal rollover rules. In other words, if you're still within 60 days, etc. But typically, this question is being asked by someone who maybe took a larger distribution in March of this year, and now, doesn't need it anymore. And they don't want – not only their RMD – but they want the excess that they took out beyond the RMD to be put back. Unfortunately, the guidance contained in Notice 2020-51 is rather specific, and talks specifically about – essentially, if it wasn't for the CARES Act, the distribution that would have been an RMD can be rolled back over. But it's very precise about that. It talks about the distribution that would have been an RMD but for the CARES Act. So, amounts taken beyond the RMD are generally not eligible for this guidance.

In-Kind Distributions And The Same-Property Rule

Perhaps the question that I have been asked most often, lately, is: "What happens if my client took an in-kind distribution earlier this year to satisfy their required minimum distribution?" Amazingly, that's cropped up probably a dozen times or so from advisors in just the last week; I've been asked that. And the question is in a large part, "Hey, my client took a distribution when the property value was low earlier this year. They didn't want to sell it, so we distributed it in kind, and now it's gone back up in value. How do we do this? What's the rule? Do we have to sell it and put back in the same amount of value? Is it the same amount of stock?" As it turns out, with respect to IRAs, there's what's called the same property rule, which means what came out of the IRA needs to go back into the IRA in order to satisfy a full rollover.

Now, the value that came out of the IRA may not be the same as what goes back in. More specifically, unless we're talking about cash, it's almost certainly not, right? Because if you took $100,000 of cash out earlier this year to satisfy an RMD – certainly, that will be a large RMD, but you get the point. You would have to put back $100,000 in cash, in order for that rollover to be considered complete. However, if you took stock that had dropped dramatically in value and it was worth, let's say, $40,000 at the time of your distribution, but now, the market has rebounded – let's just say it's back up at $75,000. Well, the $75,000 that goes back into the account right now, it's not a dollar amount. It has to be the same property, so you must take the same shares – the same number of shares that came out earlier of the same stocks – and put back in those same shares. The fact that it's worth $75,000 now doesn't matter. It's irrelevant. The same property that came out of the IRA needs to go back into the IRA. So sometimes, in some cases, people have experienced a rebound, and maybe they would have sold that property outside of the IRA already. Well, in order to complete a rollover, you've actually got to buy the same amount of shares back first and roll them back in. Again, it's the same property rule.

In essence, the way I would explain this – I suggest you think about it – is that if you're going to complete the rollover, the IRA should be put back in the same position that it would have been in, had a distribution never taken place. So for argument's sake, if you had 100 shares of ABC stocks that came out earlier this year and was valued at $40,000, well, if you never did the distribution in the first place, and the IRA held on to that ABC shares this entire time, the IRA would have enjoyed that appreciation. So it shouldn't be penalized, so to speak, if you took out that distribution earlier this year. So that's the rule with IRAs.

Now, I've heard of some advisors telling me that they've already made a mistake, and they've put back cash equal to the original distribution. Or some people have put back cash equal to the value that the shares appreciated to, in a kind of weird combination of rules, that isn't at all correct. What needs to happen there is twofold. First off, if you want to complete this rollover, you need to get those shares back in by that August 31st deadline, right? That's absolutely critical for an earlier distribution. You only have until August 31st. So the shares, or whatever property was distributed from the IRA, needs to go back in kind by that August 31st deadline.

The second part of this is that the cash that went in, well, that actually represents an impermissible rollover. It's an excess contribution, and that needs to be removed in order to avoid a 6% penalty. Now, the good news is, you've got some time for that. That fix, if you will, doesn't need to happen until October 15th of next year. You take out the cash, plus or minus the earnings that were attributable to it during the time it was in the account. Now, would I actually wait until October 15 of next year? No. You've still got other headaches to deal with at that point. I would do it as soon as possible. But the point being, the priority here has to be on getting the same property, the same shares, the same bonds, the same real estate, or whatever was distributed – the same property goes back into the IRA to finish that rollover. Absolutely critical.

Now, for those of you who had clients who took distributions from plans, and maybe those plan distributions were sold in the interim, there is an exception to this same property rule that applies to plan distributions, which simply says, "If you sold the asset, you can take the proceeds and roll them back over." But, if it was an IRA distribution, it must be the same property. So, yes, IRAs – same property. With plans, it could be the same property, or if it was sold in the interim, you can take the proceeds of that sale and roll that over to complete the rollover itself.

Finally, a lot of individuals have asked me, "Jeff, do you see more relief on the way from the IRS? Will they further extend this deadline?" While it is entirely possible that at some point later this year, Congress will include some relief in some sort of bill, or the IRS will come out with something else, they've already, very precisely, targeted retirement accounts with the guidance that was afforded under Notice 2020-51 earlier this year. And they've provided historic relief by not only giving individuals extra time, but by extending that relief to individuals who had once-per-year rollover rules and to beneficiaries of retirement accounts. So, I would not count on relief. I think it's entirely possible that we've seen the best the IRS has to offer in this area, and Congress does not go down this road themselves. They've got other big things to worry about beyond just being an election year They've got another stimulus package to pass, etc., so I would not count on that.

Advisors’ Questions Regarding RMDs

Now, that said, earlier today, I posted a quick memo that we'd be having this live discussion, and a couple of individuals did reach out with questions. More specifically – and I'm going to try and get this name right – Vinicius asked earlier today, "How will IRA repayments of rollovers of RMDs be reported by custodians, if at all?" The reporting there is going to look like any other type of rollover, so the distributing account is going to issue a 1099-R, and the receiving account will, ultimately, issue a 5498. Now, it's worth noting that the 5498, typically, doesn't arrive until after the client files their tax return, if they're filing it in a timely manner by the April 15th typical deadline. So, it's really up to you and your client to let the CPA, the tax preparer – whoever is doing that return – let them know that this is, in fact, a rollover of an RMD, that this money went back in. What you'll generally see is you'll see a gross distribution on Line 4a on the tax return or whatever line it happens to be next year. On Line 4b, you'd see it say ‘0’, assuming the full rollover was completed. Then next to it, there's an indication of RO, which simply indicates that it's a rollover. It's what lets the IRS know why the gross distribution is not taxable on the client's return. So that is on the individual level, not at the custodial level. They will still report this with a 1099-R, so it will need to be explained away by the client on the tax return.

Another question came in from Levi, and he said, "I still can't get my head around this situation for a client. My client was an IRA owner who died in January. And the RMD was distributed to the spouse monthly in January, February, March, and April of this year, from the deceased IRA owner's IRA. The spouse then settled the IRA to their own IRA." I'm assuming this is just meant as a spousal rollover. "Can the spouse now return the RMDs to their own IRA?" I would say this is an incredibly gray area, so don't feel bad, Levi, that you haven't wrapped your head around this – no one really has – because there's no clear guidance here. My thought process here is that, in general, you're not going to be able to do that. You, typically, can’t complete a rollover for the decedent, and if you can – the IRS has allowed that in various private letter rulings over the years – however, every time they've done so, they treated the money that was rolled back as having no designated beneficiary. Meaning, if it has no designated beneficiary, the spouse wouldn't be able to do that rollover anyway. So, I think that’s unlikely; what I've seen in a kind of variation of this. In fact, to answer the question earlier today, just before coming on to do this video, was a question from an advisor who said, "Jeff, my client died early in January, before taking their RMD. Everything was moved as a spousal rollover to the spouse, and then the spouse took the deceased IRA owner's RMD this year – or what they thought was an RMD. Can we roll that back?" That, I think, the answer there is yes. So, the key question is, whose Social Security number was this tied to? That I think is really going to be the critical question here. So you might, in your case, be able to make an argument, if it was tied to the surviving spouse's Social Security number, that they had already ‘elected to treat the account as their own’, in which case, the tax consequences are entirely the same as if they had done a spousal rollover, except there's actually no transaction that's done by that point. It's simply an election by the spouse. It's a little bit more of a – I hate to say an aggressive argument – but it's a little bit more on the creative side. Given the relatively small amount that's involved here, it's probably not worth looking for trouble, but it's a great question.

So with that, I want to thank those of you who have joined me tonight. If you've got additional questions, I’d love to hear them. I always love to see what's going through the minds of advisors. Hit us up at Kitces.com. Again, a transcript of this video, along with the video itself, will be posted this Thursday, so you can grab that if you've missed anything, or you want to hear something again. And, of course, you can always tweet at me @CPAPlanner on Twitter or connect on LinkedIn. Thanks so much. Wish all of you the best of success, health, and happiness for the rest of 2020 and beyond. Take care, everyone. Have a great night. Bye.