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IRS Further Expands Rollover Rules for Retirement Plans in 2020

In a move that has surprised some tax commentators, the IRS has gone “all in” on the relaxed rules for required minimum distributions (RMDs) in 2020.

Jun 25th 2020
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The nation’s tax collection agency now says that retirement plan and IRA participants can roll over RMDs by August 31 with virtually no restraints. “It’s unbelievable! It’s almost like they broke all the tax rules to give people relief!” exclaimed a noted IRA expert to Forbes magazine. “Everybody wins!”

The latest development follows on the heels of the monumental Coronavirus Aid, Relief and Economic Security (CARES) Act passed in March and initial IRS guidance issued in April.

Background: Normally, participants in qualified plans and IRAs must begin taking RMDs by April 1 of the year following the year in which they reach age 72. This start date was pushed back from age 70½, beginning in 2020, by the SECURE Act passed in January. RMDs are based on your life expectancy and your account balance on December 31 of the prior year. 

However, the CARES Act suspends the rules for RMDs for 2020, including those for inherited accounts. It also permits someone who turned age 70½ in 2019 to avoid the requirement for 2020.

Potential problem: Some taxpayers had already received RMDs in 2020 before the CARES Act was signed into law. Subsequently, the IRS issued Notice 2020-23, giving taxpayers more leeway. This Notice allowed taxpayers who received an RMD between February 1 and May 15 to roll over the payout tax-free to a qualified plan or IRA by July 15 (the extended due date for filing 2019 returns).

The usual “window” for completing a rollover without owing any tax is 60 days. Any tax withheld from RMDs that are rolled over can be recouped when the taxpayer files a 2020 return.

But the rollover option wasn’t available to non-spouse beneficiaries who had inherited accounts. Furthermore, Notice 2020-23 didn’t provide any clarity for taxpayers who had received RMDs in January. It also raised another troubling issue: Taxpayers are permitted to make only one rollover to an IRA per year and they may have received multiple RMDs earlier in the year.

Now Notice 2020-51 comes to the rescue. In broad strokes, it enables taxpayers to roll over RMDs to a qualified plan or IRA by August 31 with no tax consequences.

Specifically, the IRS provides the following:

  • Any “early birds” who took received RMDs in January qualify for a tax-free rollover if they act by August 31.
  • Someone with an IRA inherited from a parent or other non-spouse relative can also roll over RMDs into a plan or IRA under these revised rules.
  • There’s no limit on the number of IRA rollovers that may be completed by the August 31 deadline (i.e., the once-a-year limit is waived).
  • Even taxpayers who received RMDs through substantially equal periodic payments are eligible for the rollover option.

Basically, taxpayers have until August 31 to clean up any tax mess resulting from RMDs in 2020. Should your clients do it? If they expect to be in a high tax bracket this year and don’t need the money now, it usually makes sense.

However, those who are struggling to make ends meet may want to bypass this strategy, especially if they’ve already spent the money. Discuss the alternatives with your clients who are in a still in a quandary.

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