Relief for Almost Anyone Wanting to Return Unneeded 2020 Required Minimum Distribution

The IRS recently issued required minimum distribution (RMD) relief to help almost every individual looking to return an unneeded 2020 RMD. To allow more affected individuals benefit from this relief, the IRS in Notice 2020-51 extends the 60-day rollover deadline and waives other rollover rules.

This column explains what federal employees and annuitants need to know about this RMD relief and the August 31, 2020 deadline for taking necessary action.

Waiver of 2020 RMDs from CARES Act

It is important to first present some background information and subsequent action by the IRS that in turn resulted in IRS Notice 2020-51, issued on June 23, 2020.

The CARES Act was passed by Congress on March 27, 2020 in response to the COVID-19 pandemic crisis. One of the provisions of the CARES Act is that it waives 2020 RMDs from traditional IRAs and defined contribution plans, including the Thrift Savings Plan (TSP). This was obviously good news for individuals who saw their retirement savings severely decreased in value as a result of the stock market turmoil and downturn in late March 2020.

The problem is that by the time the CARES Act became law on March 27, 2020, many traditional IRA owners and qualified retirement plan owners, including some federal annuitants TSP over the age of 70.5 with TSP accounts, had already taken, or started taking, their 2020 RMDs.

Those owners who took what turned out to be unneeded and unnecessary RMDs wanted to either return the RMDs back to their original retirement accounts, or to rollover to a traditional IRA. But the majority of the RMDs did not qualify for a rollover because the traditional IRA owners missed the IRS’ 60-day IRA rollover deadline, or the rollover ran afoul of the IRS’ once-per-year IRA-to-IRA rollover rule.

But on April 9, 2020, IRS released IRS Notice 2020-23 that provided broad tax relief. One part of Notice 2020-23 is to provide relief to those individuals who previously took unnecessary 2020 RMDs. Individuals who had received RMDs earlier in 2020 – starting Feb. 1, 2020 and ending May 15, 2020 – were eligible to rollover their unwanted RMD back to their retirement plan (in the case of a defined contribution plan RMD) or to an IRA (in the case of a defined contribution plan RMD or a traditional RMD) no later than July 15, 2020. If done properly, a rollover would result in the RMD not being included in income for 2020. The IRA or defined contribution plan owner would therefore avoid paying any federal and state taxes resulting from the traditional IRA and/or defined contribution plan distribution.

Among the limitations in IRS Notice 2020-23 is that only one RMD could be rolled over. Also, excluded from relief according to IRS Notice 2020-23 were individuals who took RMDs in January 2020, those individuals with multiple RMD distributions, and nonspousal beneficiaries who took RMDs from inherited traditional IRAs and inherited Roth IRAs.

Relief for those who took unneeded 2020 RMDs

In late June 2020, IRS released Notice 2020-51 which gave complete and extraordinary relief targeted specifically to anyone who took unneeded 2020 RMDs and wanted to return those funds to their retirement account. IRS Notice 2020-51 also extended the deadline for returning 2020 RMDs to August 31, 2020. The original deadline was July 15, 2020.

The relief extended to all RMDs no matter when they were taken during 2020. If an individual took multiple RMDs during 2020, then each RMD could be rolled over by August 31, 2020 as the IRS did away temporarily (through August 31, 2020) with its once-per-year IRA to IRA rollover rule. Finally, any RMDs from inherited traditional IRAs and inherited Roth IRAs could be returned to the inherited IRA accounts.

The following example illustrates:

Example 1. Suzanne, a retired federal employee age 73, took her 2020 RMD from her traditional TSP in January 2020. Suzanne can rollover her RMD back to the TSP or to a traditional IRA anytime before Aug. 31, 2020. The amount that is rolled over can include any federal income tax withholding on the RMD, provided Suzanne has the funds to make up the difference. Assuming she does, Suzanne will get a credit for the federal income taxes withheld when she files her 2020 federal income tax return.

The IRS in Notice 2020-51 also allows those who took an unneeded RMD to convert those funds to a Roth IRA. While RMDs cannot normally be converted to a Roth IRA, because 2020 RMDs are waived (not considered an RMD) the RMDS are eligible for conversion to a Roth IRA.

The following example illustrates:

Example 2. Michael, age 74, took his 2020 RMDs from his traditional IRA in January, February and March 2020. Michael can deposit each of the traditional IRA RMDs into his Roth IRA as a conversion, provided he does so by August 31, 2020.

IRS Notice 2020-51 waives several rollover rules, the most significant of which is the 60-day limit rollover rule (an IRA owner has 60 days to rollover one IRA to another IRA). The 60-day limit is waived. Another IRS waiver is allowing repayments of RMDs that normally would be in violation of the IRS’ once-per-year rollover rule.

Through August 31, 2020, numerous IRA-to-IRA rollovers (of RMDs from one IRA to another IRA) may be repaid to the original IRA.. The IRS is therefore calling the return of the RMDs as “repayments” – not rollovers – and requiring that the funds be repaid by Aug. 31, 2020 to the same IRA from which they were distributed. The RMDs cannot rolled to a different IRA.

The following example illustrates:

Example 3. Doris, age 77, has her RMDs taken from her traditional IRA and set up to be paid out monthly. During 2020, Doris received RMD payments in January, February, March and April before she stopped the RMD payouts because of the CARES Act. Doris can repay each of the January through April IRA RMDs to the IRA from which they were made. Doris cannot rollover each of these distributions to another IRA.

The IRS in Notice 2020-51 is also allowing repayment of RMDs taken by nonspousal beneficiaries of inherited IRAs, provided it is done by Aug. 31, 2020 and repaid to the same inherited IRA.

The following example illustrates:

Example 4. Tom’s father Richard was a federal annuitant with a traditional TSP account. Richard died in 2018 and Tom was the designated beneficiary of Richard’s TSP. Tom elected to have this inherited TSP account transferred to an inherited traditional IRA. Tom took his RMD from the inherited traditional IRA in May 2020. Tom can repay the RMD back to the inherited IRA. He must do so by Aug. 31, 2020. In so doing, Tom can avoid paying taxes on the RMD. If Tom had federal income taxes withheld from the RMD, then when he repays the RMD to the inherited IRA he includes the amount for the federal income tax withholding, he will get a credit on his 2020 federal income tax return.

IRS Notice 2020-51 does not modify either the five-year rule or the ten-year rule payout for nonspousal beneficiaries of IRA owners who die in 2020. A non-spousal beneficiary (for example, a child, grandchild, sibling, etc.) must withdraw the inherited IRA assets within a certain time period. IRAs includes both traditional and Roth IRAs. One withdrawal option that has always been available for non-spousal beneficiaries is to withdraw the inherited IRA assets within five years of the death of the IRA owner.

Another option that existed before 2020 was to transfer the IRA assets to an inherited (“death”) IRA in which the beneficiary had the option to withdraw the inherited IRA assets over the beneficiary’s life expectancy. But the SECURE Act changed the rules. Effective Jan. 1, 2020, any non – “eligible designated beneficiaries” (this includes adult children) would have to withdraw the inherited IRA assets within ten years of the death of the IRA owner. IRS Notice 2020-51 clarifies that neither the five-year nor the ten-year payout option for non-spousal beneficiaries will be extended when an IRA owner dies in 2020.

The following example illustrates:

Example 5. Jennifer, age 45, is a federal employee. In February 2020, Jennifer’s mother died and named Jennifer as beneficiary of her IRA. Jennifer has until February 2030 to withdraw the assets of the IRA.

Those individuals who did contribute an RMD (as a Roth IRA conversion) to a Roth IRA as discussed previously, and now have some “buyer’s remorse”, will not find any relief from IRS Notice 2020-51. They cannot undo a conversion and return the funds to a traditional IRA or to a qualified retirement plan. In fact, the Tax Cuts and Jobs Act of 2017 eliminated the option to recharacterize or to undo a Roth IRA conversion. IRS Notice 2020-51 does nothing to change that.

The following example illustrates:

Example 6. Michelle, age 75, took monthly distributions from her traditional TSP in January, February and March. Following the passage of the CARES Act, Michelle rolled over her March TSP distribution back to her TSP account. She contributed (as a Roth IRA conversion) the January and February 2020 TSP distributions to a Roth IRA.
Now that the once-per-year rule has been waived for repayment of 2020 RMDs, Michelle would like to repay the January and February RMDs back to her TSP account. Unfortunately, she cannot undo the conversion and the January and February 2020 TSP RMDs will remain in the Roth IRA.

The RMD relief is only temporary:  August 31, 2020 deadline

It is important to take note that the RMD relief as presented in IRS Notice 2020-51 is only temporary. After the August 31, 2020 deadline, the standard rollover rules will return.

These standard rules include a 60-day deadline to perform a rollover, the once-per-year rule for doing an IRA-to-IRA rollover, and the prohibition of repayment options for nonspousal beneficiaries.  Federal employees and annuitants who are affected by 2020 RMDs and have not taken the necessary action to repay any RMD should do so by August 31, 2020.