Quick Hit: IRS Amends 2020 RMD Rules (Again!)

Retirees take note: The IRS just issued further guidance on revised rules governing 2020 required minimum distributions (RMDs)—mandatory withdrawals from retirement savings accounts like traditional IRAs and 401(k)s (those funded with pre-tax dollars). If you already took an RMD this year and don’t require the funds for living expenses, this may be news you can use.

Ordinarily, savers must withdraw a percentage of their retirement accounts annually (calculated based on life expectancy) or pay a 50% penalty. Last December’s SECURE Act raised the age at which savers must begin taking RMDs from 70.5 to 72. But then the coronavirus hit. Now 2020 is an exception for RMD takers of all ages. In an effort to spare retirees from liquidating a portion of their portfolios after stocks’ steep late-February and early March declines, Congress suspended 2020 RMDs as part of the CARES Act, which President Trump signed on March 27.

By that time, however, some folks had already begun taking 2020’s RMDs. Since the Act retroactively classified year-to-date RMDs as not required, a pre-existing rule kicked in that permits savers to return non-required distributions to the same tax-deferred account or roll them over into a new account within 60 days—provided the retiree hasn’t conducted another rollover within the last year. As of March 27, this covered anyone who took an RMD after January 28 and hadn’t executed a rollover since January 28, 2019. Anyone taking a distribution before that date—and some typically do so early in the year—was left out. Further, those taking RMDs soon after January 28 had little time to get their act together before the 60-day window expired.

Since then, the IRS has issued a couple of patches aimed at extending the suspension’s benefits to these early RMD takers. On April 9, the IRS extended the 60-day window, letting those who took distributions between February 1 – May 15 return them (or put them in a different retirement account) by July 15. Then on Tuesday, the IRS widened the rollover eligibility window for RMDs to January 1 – June 22 and again pushed the deadline, this time to August 31. The IRS also suspended the ban on multiple rollovers in the same 365-day period for RMD recipients, and it clarified that the CARES Act lets those who turned 70.5 in 2019 and were scheduled to take their first RMD by April 1 of this year wait until April 1, 2021. (The bump to age 72 took effect this year.) Likewise, inheritors of a 401(k) or IRA that the CARES Act allowed to defer 2020 RMDs may now roll back any already-taken RMDs. 

As far as what this means for investors who took RMDs earlier this year, the answer is: potentially nothing. Just because you can roll an RMD back into a retirement account doesn’t mean it is beneficial. As always, it depends on your personal situation. If you need the money for living expenses, avoiding additional monkeying may be the wisest move. If you don’t need it, though, this may be a good opportunity to avoid drawing down your savings and increasing your taxable income. The IRS has given those required to take RMDs a fairly broad reprieve this year. If you are subject to them, it behooves you to weigh how best to use it, if at all.