The Coronavirus Aid, Relief and Economic Security Act (Cares Act) was signed into law on March 27, 2020 and among other provisions, it provided favorable loans to small businesses and stimulus checks to taxpayers meeting certain income thresholds.  

Another less noticed benefit of the Cares Act was the suspension of the 2020 Required Minimum Distribution (RMD). An RMD is an annual distribution that must be taken from a participant’s retirement account beginning in the year in which the participant turns 72. Since the penalty for not taking an RMD in any year is very punitive (Taxpayer must pay a 50% penalty on any undistributed portion of their RMD) retirement plan participants subject to an RMD will often take their distribution early in the year so they can check it off their “to do” list. The Cares Act initially only waived RMDs for those who had net yet taken the RMD, unfairly penalizing taxpayers who had already taken the withdrawal. The initial Cares Act rule did not include a provision for participants to reverse the RMD they had taken prior to the implementation of the new rule.

Early on the IRS identified this glitch and finally on June 23, 2020, the IRS issued Notice 2020-51 which clarified that anyone that had taken their RMD for 2020 and wished to reverse the RMD and put it back into their retirement account can do so if they compete the reversal by August 31, 2020. This rule also applies to owners of beneficiary IRA’s that have taken their 2020 RMD but wish to return the funds to the retirement account.

However, there is one further special consideration regarding tax withholding. Most participants that are subject to an RMD have a certain amount automatically withheld for federal and state income taxes so that they don’t have to write a big check on April 15th. For instance, if a participant takes an RMD of $1000 and withholds $200 for federal income tax liability, the net amount the participant receives is $800. If the participant returns only the $800 to their qualified plan, they have still made a $200 taxable distribution, even though that money was sent to the Treasury as a tax payment. To avoid tax on any of the withdrawal, the participant will need to replace the full $1000. They will then recoup the other $200 when they file their taxes for the 2020 tax year in 2021.

Please feel free to call AOG if you have any questions regarding the Cares Act or the reversal of 2020 RMD distributions.