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.

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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.


Photo by Kira auf der Heide on Unsplash

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