Two big changes for Required Minimum Distributions (RMDs) became effective in 2020. Here is a quick overview of the changes.
The first change happened at the end of 2019 with the passing of the SECURE Act. The SECURE Act allows for IRA holders to wait until age 72 to start taking their RMD, but still allows for Qualified Charitable Distributions (QCDs) to remain at age 70 ½.
The second change happened in the midst of the COVID-19 pandemic with Congress passing the CARES Act. The CARES Act gives IRA holders the option to NOT take their RMD in 2020. The reasoning behind this is because RMDs are based on their prior year end value. It is likely that account values were significantly higher on December 31, 2019 than they were in March of 2020, therefore penalizing IRA holders into selling when the markets are lower to create cash for their Required Minimum Distributions.
August 31st Deadline
If you already took your RMD in 2020, the IRS is allowing you to return the funds back to your IRA, utilizing the 60-day rollover technique. This means, if at anytime in 2020 you took your RMD, the IRS is allowing you to return those funds until August 31st, 2020. This is also true for Inherited IRAs.
Pros and Cons
With anything, there are advantages and disadvantages to returning your RMD. Some advantages would be keeping the funds in the IRA to earn tax-free growth. Since IRA distributions are taxable as ordinary income, returning the RMD would allow you to lower your taxable income. It also allows you to do a Roth Conversion without taking your RMD first, as the IRS requires you to take your RMD before converting any IRA money to Roth. Of course, you might need the taxable income to fill up your tax bracket, so before returning your RMD, you may want to consult your tax professional. You also might NEED the money to live on. Certainly, it would not make sense to return the funds if you are using it for living expenses. Another point to consider is that you can only utilize the rollover once in a 12-month period. If you’ve already returned some of your RMD already, you cannot do so again.
If you have any questions about your RMD and whether or not you should take it or roll it over, please, give our office a call at 320.222.4236.