How to Roll Over a Required Minimum Distribution | Lord Abbett
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Retirement Perspectives

Under the CARES Act, required minimum distributions are waived for 2020. If you don’t want to keep the funds, know the rules and follow these steps for a tax-free rollover.

Read time: 6 minutes

Under the Coronavirus Aid, Relief, and Economic Security Act (CARES), the $2 trillion federal stimulus bill in response to COVID-19, required minimum distributions (RMDs) are waived for most retirement plans for 2020, which impacts other rules such as distributions eligible for rollover. As we know, 2020 has been anything but normal—and now, RMDs are eligible to be rolled over as long as a few rules are satisfied.

As I have explained previously, owners of IRAs (including SEP and SIMPLE IRAs) and qualified employer plans generally must commence taking RMDs the year in which they reach age 72, and continue every year thereafter. However, the CARES Act permits retirees to waive RMDs from their qualified employer sponsored retirement plan (i.e. 401(k), 403(b), governmental 457(b)), Federal Thrift Savings Plan (TSP) and/or IRAs (including SEP and SIMPLE) for 2020. In addition, the CARES Act also waives 2019 RMDs for those individuals who turned age 70½ in 2019 and had a required beginning date (RBD) of April 1, 2020. Therefore, any 2019 RMD amount not already withdrawn by January 1, 2020 is waived.

Notably, the waiver does not apply to defined benefit plans, non-governmental 457(b) and Substantially Equal Period Payments (SEPP) under IRC Section 72(t). The last time RMDs were waived was 2009 due to the financial crisis, which came about as part of the Worker, Retiree and Employee Recovery Act (WRERA).

There are no requirements for a retiree to be eligible for the 2020 RMD waiver. Instead, the waiver simply applies to everyone subject to an RMD from an eligible retirement account.

The CARES Act expanded retirement plan account distribution options for “coronavirus-related distributions” and increased plan loan amounts. However, these provisions require a person to satisfy certain eligibility requirements.

 

Since CARES essentially eliminated RMDs for 2020, any withdrawal that would otherwise been treated as an RMD is now in essence a normal distribution—which means it’s eligible for rollover!

 

Tip! Qualified charitable distributions (QCDs) are not affected by the CARES Act. Therefore, any otherwise eligible IRA owner who is age 70½ or older and charitably inclined can make a QCD up to $100,000 in 2020. However, QCDs will not (like in other years) satisfy an RMD because there are no RMDs for 2020.

Beneficiaries of inherited retirement accounts are also eligible to suspend their 2020 RMDs. Beneficiaries eligible for the waiver include Designated Beneficiaries (i.e. living individuals with a life expectancy) that can “stretch” post-death RMDs using their life expectancy and non-Designated Beneficiaries (i.e. charities and estates) who inherited a retirement account from a decedent who died on or after their required begin date (RBD).

How can a retiree return an unwanted RMD?
Before the CARES Act, RMDs were not eligible to be rolled over to an IRA or employer plans. However, since CARES essentially eliminated RMDs for 2020, any withdrawal that would otherwise been treated as an RMD is now in essence a normal distribution—which means it’s eligible for rollover!

If a retiree has previously taken their 2020 RMD, they potentially can roll their RMD (which is no longer an RMD due to the CARES Act) back into their IRA or employer plan (i.e. 401(k)), thus avoiding paying income tax. Unfortunately, not everyone is eligible for rollover treatment. Instead there are a few hurdles to clear.  Here are strategies, along with potential pitfalls, to assist retirees in returning an unwanted RMD.

60-day Rollover: The most straightforward and simplest method (in my opinion) to “return” an unwanted RMD is to roll over the funds during the 60-day rollover window. As discussed, in 2020, a distribution that would be treated as a RMD will not be considered a RMD, and thus would be eligible to be indirectly rolled over.

An indirect rollover can be accomplished when an individual deposits (returns) the funds into the same or different retirement account within 60 calendar days. By doing so the funds are not subject to taxation. Importantly the 60-day rollover window does not begin until a taxpayer actually receives their distribution. Furthermore, it’s critical that individuals are aware of and do not run afoul of the once-per-year-rollover rule. The rule states that a person can redeposit only one distribution back into an IRA during the previous 12-month period (365 days, not calendar year).  In other words, if another IRA-to-IRA 60-day rollover was done within the previously 365 days; the “RMD” cannot be returned. Additionally, in order for the distribution to be considered entirely nontaxable, the full amount of the distribution, including the amounts withheld for federal and state (if applicable) income tax purposes, must be deposited back into an eligible retirement account. Since a taxpayer will not have access to the funds that were withheld (sent to IRS) for tax purposes,, other (non retirement) dollars  are needed to ensure the  entire distribution is not no subject to income tax.

In response to the coronavirus pandemic, on April 10, the IRS issued Notice 2020-23 that extends deadlines for certain time-sensitive items including time to rollover an RMD. According to Notice 2020-23, if an RMD was/is taken between February 1 and May 15, and if that RMD is rolled over by July 15, 2020, then the 60-day rollover rule is waived. Notably, RMDs taken in January do not qualify for this relief, nor do any RMDs taken after May 15. In other words, a retiree who takes an RMD between February 1 and May 15, 2020 has until July 15, 2020 to roll over the RMD payment. However, for all RMDs received in January 2020 and after May 15, the normal 60-day deadline still applies. Despite this relief, the one-per-year rule still applies to all rollovers.

The aforementioned once-per-year rule can present a problem if a retiree receives their RMDs monthly, quarterly, or installments. Why? Only one distribution amount can be rolled over. Importantly, rollovers from employer plans (401(k), 403(b), and governmental 457(b)) to IRAs and vice versa do not count toward the once-per-year rule.

Example:
Kim’s RMD liability for 2020 was $10,000. Kim withdrew half ($5,000) from her IRA in March and the other half in April. Kim doesn’t need the income and would like to “return” unwanted funds by doing an IRA rollover.

The good news is Kim can roll over one of her $5,000 distributions. The not so good news is the once per-year rule only allows Kim to roll over one payment. Therefore, Kim is stuck with the other $5,000. However, if Kim is still an active employee and participates in her company-sponsored (non-IRA) retirement plan (401(k), 403(b), governmental 457(b)) that allows for rollover, she could roll the second “RMD” ($5,000) to the plan, because IRA-to-employer plan rollovers do not count toward the once-per-year rule. By successfully doing two separate rollovers, Kim would not have to include in income funds that would otherwise be subject to federal and state (if applicable) income tax!

What rollover options are available to retirees that took an RMD early in early 2020 and fall outside the 60-day rollover window or relief provided in IRS Notice 2020-23?
While rollovers must generally be completed within 60-days of receipt of the funds, the 60-day period can be extended in certain conditions.

IRS Revenue Procedure 2016-47.  A retirement plan account holder can “self-certify” to complete a 60-day rollover after the expiration of the 60-day rollover window. To qualify, the reason that the rollover was not completed in a timely fashion must satisfy one of 11 approved reasons described in Revenue Procedure 2016-47. Moreover, the rollover (assuming one of the IRS reasons are satisfied) must be completed “as soon as practicable” (30-day safe harbor) after the reason for the delay is no longer a concern. This self-certification procedure is available for missed 60-day rollover deadlines for IRAs, including Roth IRAs, SEP IRAs, and SIMPLE IRAs, and employer sponsored plans.

Tip! IRS Revenue Procedure 2016-47 does not provide relief for the once-per-year rollover rule. In other words, an individual still is subject to a maximum of one IRA-to-IRA rollover per year.

Private Letter Ruling (PLR): Another option to correct a late 60-day rollover is to seek approval from the IRS via a PLR. An IRS PLR for a late 60-day rollover is time consuming, and comes with a hefty price tag—$10,000 plus the cost of attorney fees (to help complete PLR paperwork). Furthermore, there is no guarantee that the IRS will issue a favorable ruling.

Roth conversion: Another strategy for an unwanted already received RMD is to roll over (convert) the RMD into a Roth—commonly known as a Roth conversion. Unlike Roth IRA contributions, anyone regardless of age and/or household income is eligible to make a Roth conversion. Importantly, such Roth rollovers (conversions) will be taxable, but they were going to be taxable anyway! Plus, here (funds are now held in a Roth account) future growth will potentially be distributed tax free. Roth IRA conversions are not subject to the once-per-year rollover rule.

Tip! Although a Roth conversion option does help an individual bypass the once-per-year rollover issue, it does not change the timeframe for which a Roth IRA rollover (conversion) must be finalized. Therefore, Roth conversions must generally be finalized during the 60-day rollover period unless the person satisfies an exception to have the 60-day window extended (i.e. Notice 2020-23).

Can a non-spouse beneficiary of an inherited retirement roll over an unwanted RMD?
Although the CARES Act waives RMDs from inherited traditional and Roth IRAs, non-spouse beneficiary RMDs cannot be rolled over. Ever. Therefore, any distribution already received from a non-spousal inherited retirement account will be taxable in 2020.  

Advisors, 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.

A SIMPLE IRA plan is an IRA-based plan that gives small-business employers a simplified method to make contributions toward their employees’ retirement and their own retirement. Under a SIMPLE IRA plan, employees may choose to make salary reduction contributions and the employer makes matching or nonelective contributions. All contributions are made directly to an individual retirement account (IRA) set up for each employee (a SIMPLE IRA). SIMPLE IRA plans are maintained on a calendar-year basis.

A simplified employee pension plan (SEP IRA) is a retirement plan specifically designed for self-employed people and small-business owners. When establishing a SEP IRA plan for your business, you and any eligible employees establish your own separate SEP IRA; employer contributions are then made into each eligible employee’s SEP IRA.

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.

403(b) plan (also called a tax-sheltered annuity or TSA plan) is a retirement plan offered by public schools and certain 501(c)(3) tax-exempt organizations. Employees save for retirement by contributing to individual accounts. Employers can also contribute to employees' accounts.

457 plan is available for certain state and local governments and non-governmental entities tax exempt under IRC Section 501. They can be either eligible plans under IRC 457(b) or ineligible plans under IRC 457(f). Plans eligible under 457(b) allow employees of sponsoring organizations to defer income taxation on retirement savings into future years. Ineligible plans may trigger different tax treatment under IRC 457(f).

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 (the age was increased from 70½ in the SECURE Act). Roth IRAs do not require withdrawals until after the death of the owner.

Qualified charitable distribution (QCD): An eligible individual can donate up to $100,000 (annually) via a trustee transfer directly from their IRA to a qualifying charity. The individual does not receive a tax deduction; however, the amount of the QCD is excluded from taxable income. A QCD can be used to satisfy all or a portion of an individual’s annual required minimum distribution (RMD).

Private Letter Ruling (PLR) is a written statement from the IRS issued to a taxpayer that interprets and applies tax laws to the taxpayer’s represented set of facts. A PLR is issued in response to a written request submitted by a taxpayer. A PLR may not be relied on as precedent by other taxpayers or by IRS personnel. 

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