CARES Act – Returning Unwanted 2020 RMDs
Article written by Brian Bickett
One of the key provisions of the CARES Act, the coronavirus relief act that took effect this spring, permitted retirement account holders to bypass required minimum distributions (RMDs) for 2020.
RMDs are the annual withdrawals account owners must take from most IRA’s, but not ROTH IRA’s, and 401k plans after reaching the age of 70 1/2 or, starting in 2020, the age of 72. Beneficiaries who have inherited IRA’s are also subject to RMD rules although they are slightly more complex. The CARES Act also allowed holders of Inherited IRA’s to skip the distribution for 2020.
If the RMD for 2020 has already been taken and you do not need the funds, you have until August 31 to put it back.
Find Your Financial Roadmap.
Like any other situation dealing with federal, and possibly state, income taxes and the IRS, you will want to make sure that you have dotted the i’s and crossed all of the t’s.
Because RMDs are subject to income tax, many account holders elect to have federal, and when applicable state, income taxes withheld from the distribution. If this is the case, then you must make sure to return the total distribution amount, including the tax withholding, not just the net amount you received.
For example, if you took a $5,000 RMD and $1,000 was withheld for taxes; you will need to return the full $5,000, not just the $4,000 you received. Otherwise you will still be taxed on the remaining $1,000 you didn’t return as it will remain categorized as a distribution. The $1,000 in withholding will stay with the IRS until you file your 2020 federal income taxes.
Also, because the tax rules changed so recently, make sure that the account custodian is making the transaction as a return of funds, not a contribution. Excess contributions are taxed at 6% a year as long as the excess amount remains in the IRA.
If you are entertaining returning already received 2020 RMDs, I recommend not waiting until the last minute – get started on it now. Paperwork takes time to process and mistakes do occur.
If you would like to have a conversation about the pros and cons of returning your 2020 RMDs or your retirement income planning strategy, click here to schedule a call.
Develop a roadmap to get you from where you are to where you want to go and then put it in action.
Hire a CERTIFIED FINANCIAL PLANNERTM Professional who can provide you with one-time objective advice.
Start Your Journey & Retire with Confidence
CONNECT WITH US
Iron Mountain Financial Planning LLC (“IMFP”) is a registered investment adviser offering advisory services in the States of South Dakota and Wyoming and in other jurisdictions where exempted. Registration does not imply a certain level of skill or training. The presence of this website on the Internet shall not be directly or indirectly interpreted as a solicitation of investment advisory services to persons of another jurisdiction unless otherwise permitted by statute. Follow-up or individualized responses to consumers in a particular state by IMFP in the rendering of personalized investment advice for compensation shall not be made without our first complying with jurisdiction requirements or pursuant to an applicable state exemption.
All written content on this site is for information purposes only. Opinions expressed herein are solely those of IMFP, unless otherwise specifically cited. Material presented is believed to be from reliable sources and no representations are made by our firm as to another parties’ informational accuracy or completeness. All information or ideas provided should be discussed in detail with an advisor, accountant or legal counsel prior to implementation.