IRS UPDATE: You Can Refund Your RMD if You Want To

Everytime you blink our government is (temporarily) changing a rule or guideline in order to ease the financial burden on Americans during the COVID-19 pandemic.

Don't get me wrong, I am happy they are making these moves, but you have to be paying attention to news sources 24/7 to keep up. Blink - and you might miss it.

Required Minimum Distributions "Refund"

Among the important provisions of the Coronavirus-related CARES Act were waivers for certain 2020 Required Minimum Distributions (RMDs). Retirees with withdrawals due in 2020 from their 401(k), 403(b) or an IRA all qualified for waivers (as did their beneficiaries). And, yes, the waiver included those who turned age 70½ in 2019 and had to take their first RMD by April 1, 2020.

‍UPDATE: On June 23, the Internal Revenue Service (IRS) issued a notice that folks who wished to return any or all Required Minimum Distributions (RMDs) taken in 2020 could do so by meeting an August 31 deadline. This is very important for those who blinked and did not know about the CARES waiver, and took an RMD in early 2020 before the pandemic wrought havoc on our country.

RMD Rewind

To rehash, many retirees contribute pre-tax income to tax-deferred 401(k), IRA, and other individual retirement accounts. The federal government REQUIRES these investors to begin withdrawing (and paying tax on) a set percentage of their account balance starting at age 70½ (for those born before July 1, 1949) or at age 72 (for those born after June 30, 1949). Such withdrawals are called Required Minimum Distributions. In April 2020, the IRS announced that folks who took RMDs between February 1 and May 15 of 2020 could put the money back in those accounts by July 15, but the option was off-limits to folks who withdrew RMDs in January 2020. That has since changed.

‍Real-Life Example

To illustrate, let’s assume an investor took a $10,000 RMD out in January 2020 and directed his/her custodian to withhold 20% or $2,000 for taxes. Under the second IRS action, the investor could return the net-of-tax $8,000 to his/her tax-deferred account and make up the $2,000 difference (the withheld taxes) out-of-pocket. To ultimately recover the taxes, the investor could reduce his/her 2020 quarterly estimated tax payments or await a refund on his/her 2020 return. A popular alternative considered by some is to let Uncle Sam keep the $2,000 tax portion and by the August 31 deadline convert the $8,000 balance to a Roth IRA… allowing this portion of RMDs to grow tax-free until death do you part. After conversion, Roth account owners are exempt from RMDs, but beneficiaries who inherit them are not.

By the way, if you had taken 2020 RMDs in monthly installments, you can return all of those net-of-tax distributions back into the tax-deferred account from which they came. In fact, you can even deposit the money in another tax-deferred account of your choosing. And this new relief covers everyone from account owners who had rolled over funds from one IRA to another within the past 365 days to beneficiaries (including spouses and children) to folks who turned 70½ in 2019 but who delayed taking their first RMD until 2020. But as mentioned above, the deadline to do a Roth conversion or to return RMDs taken in 2020 is August 31.

Back on Track

As you may recall, the purpose of the initial IRS action (as well as the revision) was to help older Americans avoid selling portions of their retirement account balances at vastly reduced values to meet 2020 RMDs – and hopefully buy time for their account balances to recover from the early 2020 COVID decimation. So far, the S&P 500 recovery has been remarkable… from a Feb. 19 high of 3,386 to a March 23 low of 2,237 (a loss of 33.93%) back to a July 6 close of 3,169 (a gain of 41.66%)… but still a net loss of 6.41% from the February low. In any event, a dramatic recovery from the nerve-wracking February to March decline of 33.93%.