RMD relief is here — but only until Aug. 31

Relief on required minimum distributions is here, and it will help almost everyone looking to return an unneeded 2020 RMD -- but only if they take action now. Here is what you need to know about this unprecedented relief and its fast-approaching Aug. 31 deadline.

CARES ACT

The CARES Act waived 2020 RMDs. However, by the time it passed on March 27, many retirement account holders had already taken, or started taking, 2020 RMDs. Those who took unneeded RMDs wanted to return them, but the bulk of the unwanted distributions didn't qualify for a rollover because they missed the 60-day deadline or ran afoul of the once-per-year rollover rule.

On June 23, the IRS released Notice 2020-51. This extraordinary relief extends the deadline for returning 2020 RMDs already taken until Aug. 31. After that date, the deal is off and all the regular rules will go back in effect.

Example: Jack took his 2020 RMD from his 401(k) plan back in January before the CARES Act became law. Jack can roll over these funds to the 401(k) plan (if it accepts rollovers) or to an IRA by Aug. 31.

The amount that is rolled over can include any withholding on the RMD, as long as the individual has funds available to make up the difference.

The relief also covers those who took an unneeded RMD and would like to convert those funds to a Roth IRA. RMDs normally cannot be converted. But since 2020 RMDs are waived, those funds would be eligible for conversion. The once-per-year IRA rollover rule does not apply to conversions, so even multiple unwanted RMD distributions can be converted to a Roth IRA.

Notice 2020-51 does not just provide relief from the 60-day rollover rule. In an unprecedented move, the IRS went even further by allowing repayments of RMDs that would be in violation of the once-per-year rule. The IRS is specifically calling these returns “repayments” — not rollovers — and is requiring that the funds be repaid by Aug. 31 to the same IRA from which they were distributed.

NON-SPOUSE IRA BENEFICIARIES

To the surprise of many, the IRS is making an exception with its 2020 RMD relief and allowing repayments of RMDs by non-spouse IRA beneficiaries by Aug. 31, as long as it goes back to the same IRA. This would include any 2020 year-of-death RMDs that an IRA owner did not take prior to death that would normally be required to be taken by the beneficiary.

While non-spouse beneficiaries of IRAs can return unwanted RMDs, non-spouse beneficiaries of 401(k) plans are not offered the same relief. Those beneficiaries must keep any 2020 RMDs that they take.

While the main focus of Notice 2020-51 is the return of 2020 RMDs, the notice also provides some guidance on other issues raised by the CARES Act waiver of 2020 RMDs. For instance, it clarifies that neither the five-year rule nor the 10-year payout rule for beneficiaries will be extended if an IRA owner dies in 2020.

EXCLUDED FROM RELIEF

With the expansive new IRS relief, is anyone out of luck? Yes. Those who converted an RMD to a Roth IRA and now have some buyer’s remorse will not find any help from the new IRS relief.

Some individuals who were unable to roll over multiple RMDs due to the once-per-year rollover rule converted those distributions to a Roth IRA because the once-per-year rule does not apply to conversions. Now that the IRS has waived the once-per-year rule, they are wondering if they can undo the conversions and just return the funds to an IRA.

Unfortunately, the answer is no. The Tax Cuts and Jobs Act of 2017 did away with the ability to recharacterize or undo a conversion, and nothing in the new IRS relief changes that.

RMD RELIEF ENDS AUG. 31

Those who cannot comply with these rules by Aug. 31 will be out of luck when it comes to returning a 2020 RMD. The opportunity is now, and the clock is ticking.

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