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RMD Update - Tax Relief Extended for those who already took RMDs in 2020

The Coronavirus Aid, Relief and Economic Security (“CARES”) Act waived all required minimum distributions (RMDs) in 2020 for most qualified retirement plans i.e. IRA accounts, including SEP and SIMPLE IRAs, defined contribution plan accounts such as those under 403(a), 403(b), 401(a), and 401(k), and RMDs from 457(b) plans (government employers only).

Bear in mind however that this relief does NOT exempt 2020 RMD distributions from being taxed - it rather removes the requirement to take an RMD for 2020 – So if you go ahead and take a 2020 distribution from your plan, even though you are now not required to do so, you will certainly pay tax on it in the same way as any other year.

The easiest way to keep a 2020 RMD off your 2020 tax return is to have your Custodian (Fidelity/TD Ameritrade etc.) not make the payment in the first place. If they have not already been in contact with you then contact them and direct them to waive the 2020 RMD. If your Custodian has already contacted you about your 2020 RMD, then engage with them to have the 2020 distribution waived.

What if you need to take a 2020 distribution to meet your living expenses?

If you can afford not to draw on the funds that you normally receive in the form of RMDs then best not to take them – in a normal year the IRS forces you to take RMDs for a reason – they are taxed as ordinary income at your marginal rate and, as such, represent a very inefficient way (for you) to take income.

Because of the tax-inefficiency of RMDs, you would be better off waiving the 2020 distribution and using “rainy day” money, or that cash buffer, instead of taking a distribution that you don’t have to take and that will be subject to full income tax rates. Using your own cash, has no tax consequences for you and might help to keep that distribution off your 2020 tax return. You might also consider taking only a portion of your normal distribution if you cannot afford to forgo it completely. Your Custodian can again adjust your 2020 distribution. You can also request that they pay your 2021 RMD as early as possible in 2021 so as to put you in funds as soon as possible without creating 2020 taxable income and tax liability.

RMDs and those famous Stimulus Checks

There is another less obvious benefit to not taking your 2020 RMD distribution and it has to do with the payment of the “Stimulus Checks” of $1,200 per adult. These checks come with total income limits – if your Adjusted Gross Income (AGI) is over $150,000/$75,000 (married/single), the stimulus payment begins to phase out until your AGI reaches $198,000/$99,000 (married/single), where it disappears completely.

Few people appreciate that the stimulus checks are actually an advance payment of a tax credit applicable against your 2020 tax liability and that the income against which qualification is measured is your 2020 AGI – your 2019 or 2018 tax returns may be used as a guide for initial qualification for the checks – but it is your 2020 AGI that will determine if you get to keep the stimulus payment or have it taken back (by being added to your 2020 tax bill due in April 2021).

Therefore a double benefit to not taking your 2020 RMD if it results in your AGI falling to under $150,000/$75,000 (or the higher phase-out limits of $198,000/$99,000) - this will qualify you for a tax credit or refund of up to $1,200 per adult on your 2020 tax return (think of it as a delayed stimulus check) even if your AGI in 2019 or 2018 was over the thresholds and you did not receive a stimulus check because your AGI was too high in those years.

What if you have already taken a 2020 RMD? Can it be undone?

Yes. 2020 RMDs already taken can be rolled back (via the rollover mechanism) into the original account. Furthermore, the IRS announced on June 23rd, 2020 that these special rollbacks will not be subject to the normal 60-day time limit to qualify or to the “one rollover” per 12-month restriction. (This wider relief also applies to RMDs on inherited accounts).

The June 23rd statement (IRS Notice 2020-51) is particularly helpful for those who had multiple RMDs accounts or were taking RMDs monthly – now all these distributions can be rolled back, and the income will not appear on your 2020 income tax return. But you must take action now – any 2020 RMDs which are not waived, or that are not rolled back via the rollover mechanism, will remain taxable. The IRS has again extended the deadline for these rollbacks until 31st August 2020 – clients should not count on this deadline being extended any further. Your custodian can give you exact details on how to complete an RMD roll back or waiver.

This content is developed from sources believed to be providing accurate information, and provided by Twenty Over Ten. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security.