The IRS has recently provided additional guidance pertaining to 1) the waiver of required minimum distributions – in particular for those who took distributions in January or February, and 2) added clarification for individuals that can take out distributions from their IRAs as a result of COVID-19 and avoid the 10% early distribution penalty. We have included more information about this below.
2020 Required Minimum Distributions Rollovers Clarified
The IRS in Notice 2020-51 provided welcome relief on required minimum distributions for 2020. Since the stimulus law that was enacted on March 27 waived RMDs from IRAs and workplace retirement plans for 2020, there has been the open question regarding whether IRA and plan distributions already taken out in 2020 are eligible.
You will now have until August 31 to return payouts to your IRA or plan (such as a 401(k)), from January through June, and treat the re-contributed funds as a tax-free rollover. The notice also waives the one-rollover-every-12-months trap for IRA owners who took RMD monthly installments in 2020. And rollovers of RMDs from inherited IRAs are permitted for this purpose.
Specifically, the IRS provides the following:
- Any “early birds” who took received RMDs in January qualify for a tax-free rollover if they act by August 31.
- Someone with an IRA inherited from a parent or other non-spouse relative can also roll over RMDs into a plan or IRA under these revised rules.
- There’s no limit on the number of IRA rollovers that may be completed by the August 31 deadline (i.e., the once-a-year limit is waived).
- Even taxpayers who received RMDs through substantially equal periodic payments are eligible for the rollover option.
If you expect to be in a high tax bracket this year and you do not need the money now, it will usually make sense to roll the money back into your IRA or plan account.
COVID 19 Retirement Account Distributions
On another topic related to IRA distributions, more people will qualify for a COVID-19 retirement-account-related easing. The 10% penalty on pre-age-59½ payouts from retirement accounts is waived on up to $100,000 of coronavirus-related distributions in 2020 from 401(k)s, 403(b)s and IRAs. Federal income tax on these distributions can be paid over three years, beginning with the payout year, unless the individual elects to pay the tax all at once.
Additionally, amounts re-contributed to the account at any time within the three-year time period won’t be taxable. They will be treated as rollovers and any income tax that was paid on the distribution can be recovered by filing an amended return on Form 1040-X.
The new IRS rules expand the definition of a coronavirus-related distribution. It covers payouts to account owners if they or their spouses were laid off or furloughed, saw work hours cut or less pay, had a job offer rescinded or work start date delayed, or had child care issues, all because of COVID-19. Also qualifying are distributions to people who own or operate a business that closed or was forced to reduce hours in the pandemic.
Again, if you have any questions about this information or you would like us to run some calculations for you please call our office at 802.878.1963 (Williston) or 802.775-7132 (Rutland) .