August 31 Deadline Looms Large for Retirees to Return Unwanted RMDs | Lord Abbett
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Retirement Perspectives

Retirement plan account owners and beneficiaries have until the end of the month to act on returning an unwanted required minimum distribution (RMD) and other items. 

Read time: 4 minutes

It goes without saying that 2020 has been anything other than normal. To provide relief for retirement account owners and beneficiaries that have been adversely impacted by the COVID-19 pandemic, the Internal Revenue Service (IRS) has loosened long-standing retirement account rules.

In June, the IRS published two critical notices (2020-51 and 2020-52) providing much needed additional relief permitting retirement account owners and beneficiaries to roll over (repay) 2020 required minimum distributions (RMDs) and assisting plan sponsors of Safe Harbor 401(k) and 403(b) plans to reduce or suspend Safe Harbor employer contributions in the middle of the 2020 plan year. Both IRS notices provide that August 31 is an important deadline for relief. 

Here’s what you need to know about this extraordinary relief. The August 31st deadline will be here before you know it!

On March 27, the Coronavirus Aid, Relief, and Economic Security Act (CARES) Act stimulus package passed. The massive bill created new tax favorable retirement plan distribution options for individuals impacted by COVID-19 – referred to a “coronavirus related distribution.” In addition, the CARES Act waived 2020 RMDs for both account owner and beneficiaries from defined contribution plans (401(k), 403(b), 457(b), etc.) and IRAs (traditional, SEP, SIMPLE). However, by the time the CARES Act passed in late March, many retirement account owners and beneficiaries had already taken all or part of their 2020 RMDs. Now there was a population of retirees who took RMDs early in the year (prior to CARES Act being passed) and wanted to return (repay) previously distributed funds. Unfortunately, the majority of unneeded RMDs (which now, due to CARES are no longer RMDs, they’re simply a distribution) did not qualify for tax-free rollover treatment due to noncompliance with the 60-day rollover deadline or once per year IRA-to-IRA rollover rule.

RMDs generally are not eligible to be rolled over and therefore do not qualify for tax-free rollover treatment. But considering that 2020 is unusual, the IRS stepped in to provide much needed relief via a series of “Notices” to publish guidance for certain retirement account owners and beneficiaries.

First, on April 9 the IRS issued Notice 2020-23 to extend the rollover deadline to July 15th. The notice stated that distributions from an IRA or employer sponsored retirement plan (i.e. 401(k)) taken on February 1, 2020 or later could have been “rolled” back to an IRA or employer plan beyond the normal 60-day rollover window. Importantly, the guidance applied to any distributions that were otherwise eligible to be rolled over, including RMDs. Therefore, almost anyone could have taken advantage of the July 15 extended rollover window as long as funds were returned (rolled over) by July 15. Unfortunately, the guidance didn’t include everyone. Left out of the relief were those retirees that took an RMD in January 2020, those who took more than one RMD (i.e. monthly, or in installments), and non-spouse beneficiaries.

Then, on June 23rd, the IRS published Notice 2020-51 providing additional relief for those who took RMDs in 2020 despite the CARES Act waiver.  Notice 2020-51 not only extends the 60-day rollover deadline, but it also temporarily waives several other standard rollover rules. Furthermore, this notice extends the deadline for rolling over previously taken 2020 RMDs until August 31, 2020. Thus, offering relief for those retirees who took RMDs in January 2020 or missed July 15th extended rollover window.

Second, Notice 2020-51 provides relief from the once per year (365 day) 60-day IRA rollover rule. In other words, the IRS is allowing repayments of RMDs that would otherwise violate the once-per-year IRA-to-IRA rollover rule. In other words, the IRS is allowing more than one IRA-to-IRA rollover, although temporarily. Notably, the IRS is referring to these returns as “repayments,” not “rollovers,” and more importantly is mandating that funds be repaid by August 31, 2020 to the same IRA from which they were distributed.

Example:
James took his 2020 RMD early in January from his employer’s 401(k) plan. James can roll over the RMD (which is no longer an RMD due to the CARES Act waiver) to his 401(k) or to an IRA by August 31, 2020.

Example:
Mindy’s 2020 IRA RMD was $30,000. She took installments totaling $10,000 per month (January, February, and March) during the first quarter of 2020.  Mindy can roll over all (three) distributions by August 31, 2020. However, the funds must be repaid to the IRA from which the distributions were made.  In other words, Mindy cannot rollover of any funds to a different IRA.

Non-spouse Beneficiaries

Non-spouse beneficiaries can never, under any circumstances, roll over an RMD paid to them from an inherited IRA. In an unprecedented move, however, the IRS relief includes non-spouse beneficiaries. The IRS is permitting repayments of previously distributed RMDs by non-spouse IRA beneficiaries by August 31, as long as funds are returned to the distributing (same) IRA.

Tip: Although non-spouse beneficiaries of an inherited IRAs can return unwanted 2020 RMDs, non-spouse employer (i.e. 401(k)) plan beneficiaries are ineligible. Instead, plan beneficiaries must keep any 2020 RMDs received and thus be subject to income taxes.

Example
Sheila died in 2019, naming her son Tony as her 401(k) beneficiary. In January 2020, Tony took an RMD from his inherited 401(k). IRS guidance does not allow for the return (401(k)) RMD to the 401(k) plan or an IRA. Instead Tony must keep the proceeds and include in his 2020 taxable income.

The relief offered by the IRS in Notice 2020-51 is only temporary.  Notice 2020-51 states that any distribution received in 2020 that would otherwise be an RMD but for the CARES Act waiver can be rolled over by the later of August 31, 2020 or 60 days after the date of distribution. The relief also permits non-spousal beneficiaries that inherit accounts to roll over 2020 RMDs. After the August 31, 2020 deadline, we will return to the normal rollover rules for everyone, even those individuals who are looking to return unwanted RMDs. 

If you have additional questions, please contact your Lord Abbett representative at 888-522-2388.

 

To comply with Treasury Department regulations, we inform you that, unless otherwise expressly indicated, any tax information contained herein is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties that may be imposed under the Internal Revenue Code or any other applicable tax law, or (ii) promoting, marketing, or recommending to another party any transaction, arrangement, or other matter.

The information is being provided for general educational purposes only and is not intended to provide legal or tax advice. You should consult your own legal or tax advisor for guidance on regulatory compliance matters. Any examples provided are for informational purposes only and are not intended to be reflective of actual results and are not indicative of any particular client situation.

The information provided is not directed at any investor or category of investors and is provided solely as general information about Lord Abbett's products and services and to otherwise provide general investment education. None of the information provided should be regarded as a suggestion to engage in or refrain from any investment-related course of action as neither Lord Abbett nor its affiliates are undertaking to provide impartial investment advice, act as an impartial adviser, or give advice in a fiduciary capacity. If you are an individual retirement investor, contact your financial advisor or other fiduciary about whether any given investment idea, strategy, product or service may be appropriate for your circumstances.

GLOSSARY

Traditional IRA contributions plus earnings, interest, dividends, and capital gains may compound tax-deferred until you withdraw them as retirement income. Amounts withdrawn from traditional IRA plans are generally included as taxable income in the year received and may be subject to 10% federal tax penalties if withdrawn prior to age 59½, unless an exception applies.

A Roth IRA is a tax-deferred and potentially tax-free savings plan available to all working individuals and their spouses who meet the IRS income requirements. Distributions, including accumulated earnings, may be made tax-free if the account has been held at least five years and the individual is at least 59½, or if any of the IRS exceptions apply. Contributions to a Roth IRA are not tax deductible, but withdrawals during retirement are generally tax-free.

401(k) is a qualified plan established by employers to which eligible employees may make salary deferral (salary reduction) contributions on an aftertax and/or pretax basis. Employers offering a 401(k) plan may make matching or nonelective contributions to the plan on behalf of eligible employees and may also add a profit-sharing feature to the plan. Earnings accrue on a tax-deferred basis.

A defined contribution plan is a retirement plan that's typically tax-deferred, e.g. a 401(k), at employers. An employee contributes a percentage of his/her paycheck in an account to fund retirement. The sponsor company will generally match a portion of employee contributions.

A required minimum distribution (RMD) is the minimum amount an account owner must withdraw from a retirement account each year. An owner generally has to start taking withdrawals from a retirement plan account at age 72. Roth IRAs do not require withdrawals until after the death of the owner.

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