A recent column discussed one of the provisions that resulted from the recent passage into law of the Coronavirus Aid Relief and Economic Security (CARES) Act of 2020; namely, the suspension of required minimum distributions (RMDs) for traditional IRA owners, retired qualified retirement plan owners and Thrift Savings Plan (TSP) participants over age 70.5, and inherited traditional IRA and inherited Roth IRA owners for calendar year 2020.
A few questions from My Federal Retirement readers have come in regarding how the suspension of the RMD rules affect retired TSP participants over age 70.5.
The reason for these questions is that as of April 10, 2020 the TSP had not offered any official guidance as to how the CARES Act affects TSP participants, in particular the effect on the TSP RMD rules. On April 13, 2020 the TSP informed participants about the suspension of TSP RMDs for 2020.
This column expands on the information provided by the TSP and provides answers to additional RMD-related questions.
The suspension of the RMD for 2020 means that retired federal annuitants over age 70.5 (including surviving spouses over age 70.5 who are the spousal beneficiaries of deceased TSP annuitants and who have chosen to keep their inherited TSP assets in the TSP) who own TSP accounts and who have not taken their TSP RMDs so far during 2020 are not required to take their TSP RMDs for 2020.
The TSP during 2020 will not automatically (as they have always done) send the TSP annuitants over age 70.5 their RMDS. However, there are some retired TSP participants over 70.5, or who became age 70.5 during 2019, who have in fact already taken their 2020 RMDs. The question becomes: What do these TSP participants do? Is there any relief for them?
The CARES Act became law on March 27, 2020. Anyone who took an RMD for 2020 between January 1 and March 26, 2020 is unfortunately out of luck. There is no provision in the CARES Act that allows someone to “put back” or return to the retirement plan or IRA a 2020 RMD previously received. The distribution will still be treated as such and therefore taxable in the case of the traditional TSP and Roth TSP (nonqualified distribution) RMD.
However, there is a strategy that can be utilized if an individual took an RMD from a qualified retirement plan including the TSP or from a traditional IRA, within the last 60 days that will avoid the tax due on the RMD. The strategy is that they can perform a 60 day rollover to a traditional IRA. If the rollover is done properly within the 60 day requirement, then the RMD will not be treated as a taxable distribution in 2020.
For example, suppose an annuitant had a TSP RMD of $20,000 for 2020 and the annuitant took the distribution on Feb. 25, 2020. If the full $20,000 is rolled into a traditional IRA by April 25 (exactly 60 days after it was distributed) then the distribution will count as a 60-day rollover and the $20,000 amount will not be taxable for2020.
Note, however, when the $20,000 was distributed, the TSP probably withheld 10 percent or $2,000 in federal income taxes. This means that the TSP participant received a net of $18,000 meaning that the participant has to come up with the additional $2,000 before April 25 in order to properly complete the rollover. If the full $20,000 is not rolled over, then the entire $20,000 will be considered taxable income for 2020.
Only one 60-day rollover per 12-month period
It is important to realize and understand that the IRS allows only one 60-day rollover per 12-month period. This means that if an individual has more than one RMD to take each year because of multiple retirement accounts (for example, an individual over age 70.5 owns both a TSP account and a traditional IRA) and has taken both RMDs for 2020, then only one rollover can be performed for 2020.
If the rollover is done properly within the 60-day period, then any taxes withheld from the TSP initially at the time of the RMD will be refunded when the TSP participant files his or her 2020 federal income tax returns in spring 2021. The TSP Service Office will issue a 2020 1099-R showing among other things the gross distribution, the federal income taxes withheld, and a Code “G” in Box 7 showing that the distribution was a rollover and not taxable for 2020.
The federal government waived financial companies and retirement plan providers from giving a “rollover notice”, even with the CARES Act passage. The government also waived the requirement for an employer-sponsored retirement plan to withhold 20 percent of the distribution for federal income taxes if it is an eligible rollover distribution in 2020 but would not have been eligible if the RMD requirement had still applied in 2020.
For TSP participants who do not need their RMDs for 2020 need not contact the TSP to send them any RMD for 2020. But if they err and request an RMD payment, they can in most cases perform a rollover to an IRA if they either: (1) do a direct transfer from the traditional TSP to a traditional (“rollover”) IRA; or, (2) if they use their “once every 12-months” 60-day rollover.
Annuitants who became age 70.5 during 2019 and who had not taken their TSP RMDs as of Jan. 1, 2020
For those federal annuitants who become age 70.5 during 2019 (born between July 1, 1948 and June 30, 1949), pre-CARES Act their first TSP RMD had to be taken before April 1, 2020 (their “required beginning date”). According to the CARES Act, all RMDs during 2020, including those for individuals turning 70.5 during 2019, are suspended. This means that any TSP RMD due to be taken no later than April 1, 2020 is suspended.
However, in general if a retired TSP participant who is scheduled to take his or her first RMD by April 1 (following the year the retired participant became age 70.5 if born before July 1, 1949; following the year the retired participant becomes age 72 if born after June 30, 1949) does not do so, then the TSP will automatically perform the first RMD by March 1 (or the last business day before March 1) and send it to the TSP participant.
March 1, 2020 was nearly four weeks before the March 27, 2020 passage date of the CARES Act. Any retired TSP annuitant who was born between July 1, 1948 and June 30, 1949 and who did not take their first TSP RMD as of February 28, 2020, had their first TSP RMD sent to them by the TSP Service Office on February 28, 2020 (March 1, 2020 was a Sunday). These individuals have 60 days from the day they received their TSP RMD to roll it over to an IRA. That means if the RMD was received, or directly deposited in the TSP participant’s bank account on February 28, 2020, then the TSP participant has until April 28, 2020 (two weeks away) to perform a proper 60-day traditional IRA rollover.
In so doing, the TSP participant will avoid paying tax on that TSP RMD. Also, the TSP participant does not have to take the 2020 RMD which, pre-CARES Act, would have to be taken before Dec. 31, 2020. The TSP participant’s 2020 taxable income should therefore be lower compared to what the taxable income would have been without the CARES Act.
For additional questions regarding how the CARES Act affects the TSP, please contact the Thrift Savings Plan directly here: https://www.tsp.gov/ParticipantSupport/Content/contact/index.html or the ThriftLine at 1-877-968-3778.