The CARES Act and 2020 Required Minimum Distributions

ORIGINALLY PUBLISHED APRIL 2020, UPDATED JUNE 2020

As noted in our original article dated April 6, 2020, one of the many provisions within the CARES Act was the suspension of Required Minimum Distributions (“RMDs”) from IRAs and other retirement plans for 2020. Understandably, this Act created some confusion regarding the existing rules and new exceptions. Thankfully, the IRS has issued multiple notices over the last few months to bring us more clarity. Most recently, the IRS issued Notice 2020-51, which does the following:

• extends the 60-day return window to all unwanted RMDs taken in 2020 (previously, withdrawals taken in January could not be returned),
• effectively excludes the return of unwanted 2020 RMDs from being counted as a rollover for purposes of the One-Rollover-Per-Year Rule,
• allows Inherited IRA beneficiaries to return unwanted 2020 RMDs,
• and pushes back the due date to return unwanted RMDs to August 31, 2020.

To put it simply, any individual who took a distribution from a retirement plan to satisfy a 2020 RMD now has until August 31, 2020, to return that amount. For more detail, keep reading.

On March 27, 2020, Congress passed, and the President signed into law the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”).  This fiscal response to the effects of the COVID-19 pandemic is designed to aid individuals, businesses, and health care providers, as well as states and municipalities.

The CARES Act is the largest emergency stimulus bill in history, more than doubling the act passed during the 2008/09 financial crisis.  Its various components provide an estimated $2 trillion in stimulus and economic relief.  To put this in perspective, $2 trillion is roughly 10% of the GDP of the United States in a typical year.

As noted above, the scope of the CARES Act is wide-ranging.  Provisions for individuals include:

• an increase in unemployment benefits;
• tax rebates based on income levels;
• suspended 2020 Required Minimum Distributions (RMDs);
• extended deadlines for making 2019 contributions;
• removal of the pre-age 59 ½ withdrawal penalty from retirement accounts for pandemic-affected individuals;
• allowance for increased employer retirement plan loans;
• and itemized charitable deductions for cash contributions.

Below, we discuss the CARES Act as it relates to (1) the ability to waive this year’s required minimum distributions and (2) potential options for returning unwanted RMDs that have already been withdrawn for 2020.

Required Minimum Distributions are waived for 2020

• This applies to RMDs for Traditional IRAs, SEP IRAs, SIMPLE IRAs, employer plans such as 401(k), 403(b) & 457(b) plans, and notably, inherited IRAs.
• Surprisingly, the provision eliminates not only 2020 RMDs, but also any RMD that previously needed to be satisfied in 2020. For example, individuals who turned 70 ½ in 2019 and planned to take their 2019 RMD in the first quarter of 2020 and their 2020 RMD by the end of this year can now avoid two RMDs instead of one.

Options if you’ve already withdrawn all or part of your 2020 RMD

Prior to the recent IRS guidance, your options depended on your account type and longstanding rules.

YOUR OWN IRA

In normal circumstances, RMD withdrawals are not eligible for rollover into a retirement account. Because the new law waives 2020 RMDs, however, the IRS has deemed RMD withdrawals eligible for rollover. Before the IRS issued guidance in June 2020, one needed to satisfy BOTH the 60-day rule (i.e., rollover had to occur within 60 days after receipt of the funds) and the IRA one-rollover-per-year rule (i.e., only one rollover from an IRA to another, or the same, IRA in any rolling 12-month period was allowed).

Updated June 2020: The IRS has relaxed compliance with both rules. Specifically:

1. 60-Day Rule: The rollover no longer must satisfy the 60-day rule. Any RMD withdrawal made from a retirement account in 2020 can be returned to the account. The deadline to return the funds is August 31, 2020.
2. IRA One-Rollover-Per-Year Rule: The return of an unwanted 2020 RMD to a retirement account will not be considered a rollover for purposes of the one-rollover-per-year rule.

Additionally, individuals personally affected by the current pandemic may be able to take advantage of the “Coronavirus-Related Distribution.” This separate provision within the CARES Act allows individuals to repay, over a three-year period, 2020 retirement plan distributions up to $100,000, regardless of when in the year they received the distributions.

YOUR EMPLOYER RETIREMENT PLAN

Prior to the recent IRS guidance, you could roll the funds into an IRA in your name if the distribution took place within the last 60 days. Updated June 2020: As with IRAs, the Treasury Department and IRS have effectively extended the 60-day rollover period to cover any RMD withdrawals made in 2020 so long as the plan participant returns the funds by August 31, 2020. Per IRS rules, the one-rollover-per-year limit does not apply for plan-to-IRA rollovers. 

INHERITED IRAs AND INHERITED ROTH IRAs

Updated June 2020: A RMD from an inherited IRA of any kind—from a spouse, a non-spouse, or subject to the 5-year rule—that occurred on or after January 1, 2020, can be returned to the IRA until August 31, 2020.

• Inherited IRA from Spouse: Before the IRS issued the new guidance, a surviving spouse could move the funds into an IRA in their own name, as a spousal rollover, by taking advantage of the 60-day rollover option mentioned above. Updated June 2020: This is still the case, but the surviving spouse is no longer limited to the 60-day rule. A RMD from an IRA inherited from a spouse that occurred on or after January 1, 2020, can be returned to the IRA until August 31, 2020. 
• Inherited IRA from Non-Spouse: Before the IRS issued the new guidance, a non-spouse would not be able to undo any 2020 RMDs already taken since they could not execute a 60-day rollover. Updated June 2020: This is no longer the case under the new IRS guidance, which provides that a RMD from an IRA inherited from a non-spouse that occurred on or after January 1, 2020, can be returned to the IRA until August 31, 2020.
• Inherited IRA Subject to 5-Year Distribution: Generally, these would be IRA assets inherited through a will or trust that did not qualify as a designated beneficiary and thus a lifetime distribution. The CARES Act allows for an additional year as there would be no mandatory withdrawal for 2020. For those subject to the 5-year rule for IRAs inherited from 2015 to 2020, the 5-year rule is now effectively a 6-year rule. Before the new IRS guidance, if the RMD had already been taken for 2020, there was no way to put the funds back into the inherited retirement account. Updated June 2020: This is no longer the case under the new IRS guidance. A RMD from an inherited IRA subject to the 5-year rule that occurred on or after January 1, 2020, can be returned to the IRA until August 31, 2020.

Can Qualified Charitable Distributions (QCDs) still be made in 2020?

Yes, for IRA owners over the age of 70 ½. Even though RMDs are suspended for 2020, QCDs can still be made.  Of course, the distributions would not offset any RMD amounts in 2020 but would allow an individual to make charitable contributions using pre-tax dollars.

We expect that the IRS will release additional guidance in the coming weeks and months to address specific questions and scenarios that have been raised by the new law.  Please consider the above our initial understanding of the new law and not personalized tax advice. Please give us a call if you would like to discuss how it will impact you. We look forward to the opportunity to serve you.

This information is believed to be accurate but should not be used as specific investment or tax advice. You should always consult your tax professional or other advisors before acting on the ideas presented here.