The CARES Act caused some confusion regarding Required Minimum Distribution (RMD) and IRS Notice 2020-51 cleared it up.
The CARES Act helped the RMDs to be waived. If the RMD is taken 2020 then you have now until August 31, 2020, and roll it over or putting it back into a qualified account. The RMD does not qualify to be rolled over but it is automatically qualified for 2020 RMDs rollover treatment. The one rollover per 12-month rule period does not count in 2020 RMD rollovers.
Engaging with rollovers is generally prohibited from non-spousal IRAs. However, as long as they are rolled by August 31, 2020, 2020 RMDs from non-spousal IRAs are eligible for rollover treatment.
The IRS issued Notice 2020-51 last June 23, 2020. The CARES Act created confusion around Required Minimum Distributions (RMD) and the purpose of the notice is to bring clarity to it. The waiver of all 2020 RMDs is allowed by the CARES Act. It also allowed those RMDs already taken to be rolled over to accounts that are eligible or returned to the qualified plans from which they originally came. To get the Act passed immediately, addressing several key points of the existing law has failed. It created confusion and frustration instead of relief for taxpayers.
Three issues surrounding RMDs of the CARES Act
The Rollover of 60-day Rule: The IRA beneficiaries are allowed to withdraw funds from the qualified plan for up to 60 days without any penalty under the current tax law. There is no tax to be paid and no early withdrawal penalty as long as they will return the fund within 60 days. At the end of March 2020 the CARES Act was passed in the Congress. Many individuals already took their RMDs and were outside the 60-day rollover window by that time. But there was an extension of the 60-day rollover window on July 15, 2020, for RMDs that was taken February 1st or later. RMDs taken in January weren’t applicable to it. Under the new law, the distributions had no relief.
The Rollover IRA Rule: You may only roll over one IRA distribution in a 12- month period under the current tax law, and the RMDs are prohibited to be rolled over. Those beneficiaries who already conducted one rollover in 2020 are also prohibited by law from rolling their RMDs into another qualified account subsequently. For these taxpayers, the CARES Act had no reliefs allocated for them.
The IRAs non-spousal beneficiaries: Non-spousal beneficiaries are strictly prohibited from engaging any rollovers under current tax law. For those non-spousal beneficiaries that had not yet taken their 2020 RMDs, the need to take them has been eliminated. The CARES Act provided no relief for you in rolling those funds back into an account if you already took 2020 RMDs.
In what way did IRS Notice 2020-51 Attempt to remedy these issues?
These technical issues were tried to be fixed by the IRS Notice 2020-51. Until August 31, 2020, the notice states that you now have to roll over all 2020 RMDs that were previously distributed. The RMDs taken in January are included. It also states that the rollover or repayment of RMDs will not be considered as a rollover for purposes of the rule of the one rollover per 12 month period. The non-spousal beneficiary RMDs is allowed for the rollover. All taxpayers subject to RMDs that are qualified for the tax relief the Congress intended for the CARES Act will definitely give thanks to the IRS.
Those individuals who took RMDs and those who would like to put them back should consider this as great news. You can reduce your current year taxable income and allow the funds to grow tax-deferred for an additional year by means of putting them back.
You might find the IRS Notice 2020-51 confusing and hard to understand. To learn more about it and the CARES Act, consider consulting a tax professional. It helps to have a professional explain the technical side of these tax rules and to make sure you’re not missing any tax advantages or is not violating any rules with regards to RMDs and rollovers.
