At age 72, retirees are required to take withdrawals every year from their retirement accounts. In March, the new CARES Act waived the need for retirement account owners and beneficiaries to take a Required Minimum Distribution (RMD) for 2020. This rule went into place to help people who watched their savings go on a roller coaster ride due to the Coronavirus pandemic. Many people of course had already taken their distribution for the year by that time and wanted to return the money at the announcement of the CARES Act rule but were unable to do so.
There is more good news for RMDs this year. The IRS announced in June that those who took unneeded RMDs from Jan. 1 through June 30 and now want to return the money to their retirement account may do so, but only until Aug. 31, 2020. This rule includes those who took multiple distributions, and non-spouse beneficiaries who took distributions from inherited IRAs. The repayment will be considered a tax-free rollover and is not subject to the rule that allows only one rollover every 12 months. Those who converted their RMD to a Roth IRA will not be able to take advantage of this new IRS relief rule. In other years, failing to take a distribution that is required earns a 50 percent penalty on the amount that should have been withdrawn, in addition to the income tax on that distribution.
Why is it a good idea to take advantage of the ability to replace RMDs that were taken earlier this year? Well, for anyone who has retired, this allows them to keep money in their retirement accounts a bit longer and potentially recoup any lost value. Also, the 2020 RMD is calculated based on the value of the account as of Dec. 31, 2019, which means the amount required was calculated at a likely higher amount before the market fluctuated. Less taxable income for 2020 is another benefit. While keeping the withdrawn money is certainly not a bad decision if you truly need it, putting it back can provide benefits and why not take advantage of the generosity of the IRS this year. After all, this rule applies only to this year and only through Aug. 31, 2020.
Bayntree Wealth Advisor provides comprehensive financial planning and wealth management. The Bayntree team specializes in all aspects of financial health, including retirement planning, risk management, investment advice, tax strategies, estate planning and insurance.
Bayntree does not provide specific legal or tax advice. Please consult with your tax advisor or legal professional for guidance with your individual situation.