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Retirement Perspectives

The IRS issued new guidance that extends the rollover deadline and relaxes other rules for RMDs.

Read time: 3 minutes

On June 23, the IRS released Notice 2020-51 that extends the rollover deadline for required minimum distributions (RMDs) taken from either an employer sponsored retirement plan or individual retirement accounts (IRAs). The notice stipulates that unneeded 2020 RMDs can be rolled over to an IRA or employer sponsored retirement plan by August 31, 2020.

Generally, required minimum distributions must be taken from IRAs starting at age 72 and cannot be rolled over. However, under the Coronavirus Aid, Relief, and Economic Security (CARES) Act, RMDs are waived for 2020. The waiver includes lifetime, beneficiary, and first-time 2019 RMDs from both defined contribution plans (401(k), 403(b), etc.) and IRAs. 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).

Eligible rollovers include amounts that—but for the CARES Act waiver—would have been 2020 RMDs (including an amount to be taken by an April 1, 2021 required beginning date (RBD)), and amounts that are part of a series of periodic payments made at least annually over life expectancy, or over a period of 10 or more years.

As we explained in our May 8 article, since the CARES Act essentially eliminated RMDs for 2020, any withdrawal that would otherwise been treated as an RMD is now a normal distribution—which means it’s generally eligible to be rolled over to an IRA or employer sponsored retirement plan.

 

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

 

While the CARES Act became law in late March, numerous retirees had already received a 2020 RMD (either a partial distribution or the full amount) and now wanted to repay (rollover) those amounts to avoid paying taxes on the RMD (which is now no longer classified as an RMD). On April 10, in response to the coronavirus pandemic, the IRS issued Notice 2020-23 that extended deadlines to roll over an RMD. According to Notice 2020-23, if an RMD was 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 did not qualify for relief. In other words, for all RMDs received in January 2020 and after May 15, the normal 60-day deadline still applied.

Furthermore, the once-per-year 60-day rollover rule still applied to all IRA rollovers. This rule prohibits an IRA owner from making more than one traditional IRA-to-traditional IRA or Roth IRA-to-Roth IRA rollover in any 12-month period.Finally, non-spouse beneficiaries were unable to roll over RMDs from inherited retirement accounts since non-spouse beneficiaries are not eligible to do a rollover.

  • Notice 2020-51 provides even further 60-day rollover relief, by extending the 60-day-rollover window for all unwanted 2020 RMD distributions to August 31, 2020 or 60 days after receipt of the distribution. So you have until the end of August to roll over any unwanted RMD that was previously eliminated by the CARES Act.
  • The extended deadline covers RMDs taken any time in 2020 – including those distributions taken in January 2020.
  • 2020 RMD repayments do not have to follow the once-per-year 60-day IRA rollover rule. In other words, it will not be treated as a rollover for purposes of the one rollover per 12-month period limitation.
  • Finally, the IRS created an exception to allow non-spouse beneficiaries to roll over inherited IRA RMDs. Notably, while beneficiaries are prohibited from completing 60-day rollovers, the relief via Notice 2020-51 essentially allows beneficiaries to ignore this portion of the tax code and roll over their 2020 inherited RMDs until as late as August 31, 2020.
  • It appears that a qualified plan (i.e. 401(k)) distribution can be rolled into any eligible retirement plan, but an IRA distribution must be rolled (back) into the distributing account. These requirements reflect that many 401(k) plans do not accept rollovers, as the law does not require it. Whereas it's anticipated that all IRA custodians will accept rollovers.
  • IRS guidance in Notice 2020-51 applies to RMDs only. Therefore, distribution of funds that aren’t otherwise RMD proceeds still must comply with the 60-day rollover deadline. Furthermore, distributions of amounts other than RMDs are still subject to the once-per-year (i.e. 365 days) rollover rule.

Another strategy for an unwanted already received RMD is to roll over (convert) the RMD into a Roth IRA—commonly known as a Roth conversion. One hiccup: funds deemed RMDs are ineligible for a Roth conversion. As discussed, 2020 RMDS have been waived. Therefore, a retiree can convert funds that were otherwise earmarked as an RMD to a Roth IRA.

In addition, unlike Roth IRA contributions, anyone regardless of age and/or household income is eligible to make a Roth conversion. Importantly, unlike a repayment (rollover) of 2020 RMD funds, Roth rollovers (conversions) will be taxable and thus be considered 2020 income. A Roth conversion could be attractive for individuals that that wil be in a low(er) tax back in 2020. The upside: funds in a Roth account can grow and potentially be distributed tax free to the account owner and/or her heirs when they retire. Furthermore, Roth IRAs are never subject to RMDs for an account owner or a surviving spouse.

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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