Earlier this week, the IRS made some adjustments to the required minimum distribution (RMD) rules for 2020.  First, some background.  With the passage of the SECURE ACT, an RMD for 2020 is no longer required.  But what if you had already taken your RMD?  Can you put it back?  Well, that depended on when you took it.  For those people who took their RMD out during the March through June window, they were allowed to reverse the transaction and put it back into their account without penalty.  In April, the IRS announced it would allow distributions that were taken in the month of February to be returned.  However, if you happened to have taken your RMD anytime in January, you were out of luck and could not put that money back into your retirement account. 

Just this week, things changed when the IRS announced that anyone who had taken withdrawals, regardless of when they were taken, would be allowed to put the money back into their retirement account as long as it was done prior to August 31st.  Effectively, this was an extension of the normal 60-day rule.

Depositing the funds back into your retirement account has several possible benefits and considerations:

  • Lower income usually means lower taxes.  You should certainly check with your CPA regarding your particular situation as to whether it is beneficial for you to return some or all of this year’s distributions, but in doing so you likely will save on this year’s taxes.
  • The lower income for 2020 could impact your Medicare rates, again this should be discussed with your CPA.
  • Consider converting the RMD into a Roth IRA. In this scenario, you would not put the distribution you received back into the same account, but rather into a Roth IRA where the amount can be invested, tax-free.
  • For some that may have taken the RMD and simply deposited into a non-qualified investment account, moving the money back is a relatively simple process. 
  • For others, particularly if you are using the funds as a source of regular retirement income, coming up with the money to deposit the funds back into the retirement account can be a bigger challenge.
  • However, if the RMD is not needed for monthly retirement support or a specific purpose, it may even make sense to borrow the money for a few months in order to avoid the extra taxes.  This should be determined on an individual basis as to what makes sense for you, but an example could be:
    • A client could draw on a home equity line or take a short-term margin loan in order to generate the cash needed to deposit the funds back into their retirement account.
    • Since they will not be needing the 2021 RMD for living expenses, they will simply use that money to pay off the loan in early 2021.

In short, every investor, whether it is a traditional IRA or perhaps an inherited IRA should review their situation and determine whether reversing the RMD is beneficial to them or not.  If you and your CPA decide it is beneficial then we welcome the opportunity to assist you with finding a source of funds to make the deferment a reality.  Whether you are an existing client or simply need some independent guidance in regards to these questions we hope you feel comfortable contacting us for a complimentary review of your specific situation.