“It’s ironic—people used to want to suspend me and talk about how bad my behavior was, but now they like it when I shout and scream.” ~ John McEnroe
Question: Earlier this year, I took the Required Minimum Distribution (RMD) from my IRA. I don’t need the money and am wondering if it can be put back into my IRA? I heard something about this in connection with the COVID-19 situation that I may not have to take the distribution. If I don’t need the money, can I put it back and not pay taxes on this amount?
Answer: You’re right. According to the most recent version of the Coronavirus, Aid, Relief and Economic Security (CARES) Act, you have until August 31 of this year to replace any amounts withdrawn from an IRA that would have been considered an RMD for 2020, back into those accounts. Of course, everything is subject to change, but at this moment, that is the ruling.
If you’ve taken a withdrawal, you may want to ask yourself two questions: Do I need the funds? How will my tax return be impacted this year and in the future by taking or not taking the funds? You have the answer to the first, but it may be useful to also think about your tax bracket, future required distributions and financial lifestyle including “wants and needs.” Not all retirement savers need access to their IRA funds during retirement making RMDs an unwelcomed taxable distribution. The unintended consequences should be examined where applicable.
There are some who may need to access retirement accounts to get them through this unusual time. The CARES Act provides several unique and potentially advantageous ways to access funds. There is something called a Coronavirus-Related Distribution (CRD). A CRD allows for a withdrawal of up to $100,000 and waives the 10% early-withdrawal-penalty if it were to apply. Income taxes are still owed on these distributions but can be spread out over the next 3 years. Anyone diagnosed with the Coronavirus, who has a spouse or dependent diagnosed with the disease, or who has been quarantined, furloughed, laid off, has reduced work hours or is lacking childcare because of COVID-19 is eligible for a CRD. Business owners who’ve had to reduce business hours or close would qualify for CRD as well. If a special distribution is not necessary, it’s generally best to avoid taking early withdrawals from retirement accounts thereby allowing you to take advantage of the potential for tax-deferred growth.
As a recap, required minimum distributions are suspended for 2020 on traditional individual retirement accounts (IRAs), SEP, SIMPLE, 401(k), 403(b), government 457(b) plans and inherited IRAs. Lastly, retirement accounts subject to the 5-year distribution rule following an owner’s death can skip 2020 when counting the 5 years, making the 5-year rule effectively a 6-year rule if received between 2005 and 2019.
The bottom line is that in most instances, you have until August 31, 2020, to return an RMD to your retirement account and it will be treated as a rollover. This is similar to 2009 when RMDs were suspended due to market conditions. At the risk of overcomplicating a situation, it may make sense to take your RMD if you expect to be in a lower tax bracket this year as compared to future years.
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