Edward A. Zurndorfer–
The IRS recently announce in Notice 2020-127 that any individual who previously took a required minimum distribution (RMD) at any time during 2020 from IRAs and qualified retirement accounts – this includes 401(k), 403(b) retirement plans and the Thrift Savings Plan (TSP) – now has the opportunity to roll these funds back into a retirement account and therefore not have to pay any tax on the 2020 RMD. This IRS notice is one of several such notices following the passage of the CARES Act on March 27, 2020.
To understand the implications of Notice 2020-127, it is important to review the initial IRS notices regarding the suspension of 2020 RMDs immediately following the CARES Act passage.
CARES Act Waiver on RMDs
One of the provisions resulting from passage of the CARES Act is the waiver of RMDs from company- and government-sponsored retirement savings plans (this includes 401(k), 403(b) and 457 retirement plans and the TSP), Simplified Employee Pension (SEP) and SIMPLE Plans, and traditional IRAs. Defined benefit plans (such as CSRS and FERS annuities are not part of the RMD waiver because defined benefit plans generally do not have RMDS.
It should be emphasized that RMDs can still be taken in 2020. But RMDs during 2020 are not mandatory and any withdrawals are strictly voluntary. Federal, and in most states, state Income taxes must be paid on the amount of retirement plan withdrawal.
There are individuals who, prior to the passage of the CARES Act, took their 2020 RMDs. This includes federal annuitants over age 70.5 who took their TSP RMDs in January, February or early March 2020. The following example illustrates:
Eleanor retired from federal service in December 2018 and became age 70.5 in November 2019. She was born in May 1949. Under TSP RMD rules, a federal annuitant is required to take his or her first TSP RMD by April 1st following the year he or she becomes age 70.5. In Eleanor’s case, this means she had to take her first TSP RMD by April 1, 2020. In early February 2020, Eleanor took her first TSP RMD.
About six weeks after Eleanor took her first TSP RMD, the CARES Act became law. The question that Eleanor should ask herself is: Am I eligible to “put back” this RMD payment into my TSP account and therefore not be taxed on the amount of the RMD? As an alternative to a rollover back to the TSP, or to a qualified retirement account, or to a traditional IRA, can the RMD go into a Roth IRA?
The IRS in early April 2020 answered these two questions as follows: RMDs normally cannot be rolled over to a traditional IRA or qualified retirement account, or be converted to a Roth IRA. However, the CARES Act waived 2020 RMDs. This means that any RMD already taken in 2020 was not considered an RMD and therefore any RMD can be rolled over to a traditional IRA or to a qualified retirement plan including the TSP. It can also be converted to a Roth IRA, as long as the RMD meets the usual rollover rules.
One of those usual rollover rules is that a rollover be performed within 60 days of receipt of the distribution, in this case the RMD. But the IRS in early May 2020 ruled that any individual who received an RMD between Feb. 1, 2020 and May 15, 2020 has extra time until July 15, 2020 to roll it over. This means that in the example above, Eleanor can rollover her TSP RMD that she received in early February to either the TSP or to a traditional IRA. She has until July 15, 2020 to perform this rollover.
IRS guidance with regard to expanded rollover relief to RMDs taken between Feb. 1, and May 15, 2020 was explained in IRS Notice 2020-23 which was issued in early May 2020. But certain rules regarding rollovers and RMD situations were not changed as a result of IRS Notice 2020-23. These rules included:
- (1) Once-per-year rollover rule still applies. If another IRA-to-IRA 60-day rollover was performed within the previous 365 days, then the RMD cannot be rolled back. This means that if an individual received his or her 2020 RMD via monthly payments in early 2020, only one RMD payment can be rolled to an IRA. Note that rollovers from employer-sponsored retirement plans to IRAs and vice versa do not count toward the once-per-year rule. The following example illustrates:
George, age 74, withdrew half of his 2020 RMD from his traditional IRA in February 2020 and the other half in March 2020. George would like to roll the two payments back into his IRA. The once-per-year only rule allows George to rollover one of those payments.
- (2) Nonspousal inherited (“death”) IRA RMDs. This includes both traditional and Roth nonspousal inherited IRAs. This rule is unaffected by the rollover relief in IRS Notice 2020-23. While the CARES Act waived 2020 RMDs from both inherited traditional IRAs and inherited Roth IRAs, payments received prior to the CARES Act passage could not be returned to the inherited IRA.
IRS Announces Complete Rollover Relief for RMDs from All Retirement Account and Extends Rollover Deadline to Aug. 31, 2020
In IRS Notice 2020-127 issued on June 23, 2020, the IRS announced that any individual who previously took an RMD in 2020 from any type of qualified retirement plan, traditional IRA, SEP IRA, SIMPLE IRA, inherited (“death”) traditional IRA, and inherited (“death”) Roth IRA has the opportunity to roll those funds back into a retirement account. Furthermore, the 60-day rollover period deadline for any RMDs previously received this year has been extended to August 31, 2020. This extension (original deadline was July 15, 2020) is to give affected individuals more time to take advantage of this opportunity.
In addition to the rollover opportunity, an IRA owner who has already received a distribution from an IRA of an amount that would have been an RMD in 2020 can repay the distribution to the IRA by Aug. 31, 2020. IRS Notice 2020-127 provides that this repayment is not subject to the one rollover per 12-month period limitation and the restriction on rollovers for inherited (“death”) IRAs. In other words, even RMDs from inherited IRAs (both traditional and Roth) can be rolled back into their inherited (“death”) IRAs with no limits and tax consequences.
IRS Notice 2020-127 applies to all RMDS taken at any time during 2020, including in January 2020 and after May 15, 2020. Note from above that IRS Notice IR 2020-23 that was issued in May 2020 applied only to RMDs taken between Feb. 1 and May 15, 2020, which could be rolled over but with a deadline date of July 15, 2020.
An RMD taken from a qualified retirement account earlier in 2020 cannot be rolled back to the retirement account if, subsequent to the RMD withdrawal, the entire retirement plan account was transferred to a traditional IRA. In that case, the RMD would have to be rolled over to an IRA. The following example illustrates:
William, age 72, owned a 401(k) plan earlier in 2020. In February 2020, William took his 2020 RMD from the 401(k) plan. In early March, William directly transferred the balance of his 401 (k) plan into a self-direct traditional IRA.
William would like to rollover his 2020 RMD to his 401(k) plan. Since he transferred his entire account directly into an IRA, the 401(k) plan has been closed. William can rollover his 2020 RMD to a traditional IRA, including into the IRA that he rolled his 401(k) plan.
Those qualified retirement plan account owners including TSP participants who want to transfer their accounts to self-directed IRAs are encouraged to keep at least $1,000 in their retirement accounts rather than transferring the entire amount. In so doing, this will allow the account to remain open in case any previous transferred money need to be directly transferred back in the future.
*The case studies presented are for illustrative purposes only. Individual cases will vary. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Prior to making any investment decision, you should consult with your financial advisor about your individual situation. RMD’s are generally subject to federal income tax and may be subject to state taxes.
Edward A. Zurndorfer is a Certified Financial Planner, Chartered Life Underwriter, Chartered Financial Consultant, Chartered Federal Employee Benefits Consultant, Certified Employees Benefits Specialist and IRS Enrolled Agent in Silver Spring, MD. Tax planning, Federal employee benefits, retirement and insurance consulting services offered through EZ Accounting and Financial Services, and EZ Federal Benefits Seminars, located at 833 Bromley Street – Suite A, Silver Spring, MD 20902-3019 and telephone number 301-681-1652. Raymond James is not affiliated with and does not endorse the opinions or services of Edward A. Zurndorfer or EZ Accounting and Financial Services. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. While the employees of Serving Those Who Serve are familiar with the tax provisions of the issues presented herein, as Financial Advisors of RJFS, we are not qualified to render advice on tax or legal matters. You should discuss tax or legal matters with the appropriate professional.