Paper with Required Minimum Distributions RMD on a table
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Marty Davidoff of PragerMetis has given me a heads up to accommodations the IRS is making to follow through on the spirit of some of the relief that Congress has given taxpayers under the CARES Act and the SECURE Act. This is about required minimum distributions.
Two Acts That Affected RMD
Once you reach a certain age, you are required to start taking distributions from your retirement accounts every year. You have until April 1 of the year after you meet the age to take the first one, but that will require you to take two in that year. The “certain age” was 70 1/2, but the SECURE act changed that to 72 after December 31, 2019.
Then came the CARES Act, which allowed everybody to skip the RMD required for 2020. You have sixty days from taking an IRA distribution to roll it over. So people who had taken their RMD early had a chance to put it back, unless they had taken it really early and of course some people who might have had time to do a rollover might not have reacted quickly enough.
Relief
Notice 2020-51 grants relief. To the extent distributions taken from IRA and other retirement plans would have qualified as required minimum distributions – including those made prior to April 1 for people who turned 70 1/2 in 2019 to cover the 2019 RMD you now have until August 31 to put the money back. The move will not count as the one allowed rollover per year, so you may still do a rollover for some other purpose.
The notice also addresses plan distributions and gives direction to plan administrators. You may have received a plan distribution that was not considered roll over eligible because of your age. Check with your plan administrator if that has happened.
Planning
Of course if you needed that money to live, this is of little relevance, but otherwise I think the smart move would be to put it back, but don’t forget about it. Towards the end of the year, you may want to decide what the optimal distribution might be. Of course if you have lots of other income, it might be zero, but it might be some number between zero and your RMD.
There is not necessarily a right answer, but you want to consider what would be a tax rate that would cause you to want to liberate money from your IRA. This is not a computation you can do by just looking at the rate table. Reilly’s Sixth Law of Tax Planning – Don’t Do The Math In Your Head. The income tax is full of all sorts of thresholds and phaseouts that might affect your decision.
The one that is most likely relevant in this case is the taxability of Social Security benefits. At high incomes they are 85% taxable and at low incomes they are 0% taxable. Here is a description of the computation, but the smart way to do it is with good software that has the rest of your projected return information in. You might also want to go through this exercise in years before you turn 72.