Mary Owens: Further clarification on the elimination of Required Minimum Distributions from IRAs for 2020
I intended to continue the story of Joe Smalley this month and his dilemma with the improper titling of his assets. However, the tax laws that were passed by Congress earlier this year concerning Required Minimum Distributions (RMD) for 2020 received important clarifying statements from the IRS recently. Since this topic has such a high level of importance for tax planning, I once again will postpone the topic related to dear Joe’s asset titling issue until next month.
I previously wrote about various provisions of the CARE Act, which was passed into law earlier this year. I have repeated a small portion of the tax update as a refresher:
The new law gives a tax break to those who are old enough to be taking a Required Minimum Distribution (RMD) from their defined contribution plans including IRA, 401(k), 403(b) and 457(b). The CARE ACT includes a temporary waiver on minimum mandatory distributions for 2020 so that those who do not need the income can potentially reduce their tax bill. If you do not want the additional income from an RMD, you are not required to take it for 2020 ONLY.
The act still allows you to direct all or a portion of your RMD to charities without including the distribution that was donated as taxable income. You cannot deduct the charitable distribution on your tax return, but you also do not have to itemize your deduction to receive the tax benefit. So many charities are deeply hurting from the impacts of COVID-19. This provision is one way you can assist your favorite charity without increasing your taxable income.
What was not clear at the time of the passage of the bill was the ability to return into your defined contribution plan the 2020 distributions that were taken prior to the passage of the bill. The existing tax law allowed you to pay back only the last distribution if it was repaid in full within 60 days of the distribution. If you had taken multiple distributions in 2020, or if your last distribution was more than 60 days prior, the rules allowing you to return prior 2020 distributions appeared to not allow the redepositing of the unneeded funds. Further clarification was needed and has now been provided by the IRS via Notice 2020-51.
If you return all of the funds you have received in 2020 to your defined contribution plan by August 31, 2020, you will avoid taxation on those funds. They will be treated as a tax-free rollover. This new rule applies to inherited IRAs as well.
There are complications if you had federal and state income tax withheld from your distributions. You must pay back the gross sum taken, including the taxes withheld, to avoid all taxation. The IRS and the related state withholding will not be paid back into your defined contribution plan by those agencies. You must be able to pay those funds back into your account out of other sources to avoid being taxed on the portion of your distribution that was tax withholding. However, if you can pay back the entire sum into your defined contribution plan by August 31st, those tax withholdings will be a credit on your 2020 income tax return.
For those of you making estimated tax payments for 2020, you should check with your tax professional to see if you can reduce your estimated tax payments for the additional credits you will be receiving on the repaid tax withholdings back into your defined contribution plan. That would assist in evening out your cash flow demands for the 2020 year.
For those of you who have the rare situation of receiving stock as an RMD distribution out of an IRA, you will not be able to return this distribution if you later sold the stock. An IRS rule requires that you roll back the same property as you received in the original distribution. As an example, if you received 200 shares of IBM stock from your IRA and then you sold those shares, you no longer own the property that must be rolled back into your IRA. Notice 2020-51 did not specifically address this issue. Hopefully, it will be addressed shortly.
As a final reminder, you must return all the funds into your defined contribution plans on or before Aug. 31 to take advantage of Notice 2020-51. This deadline is less than a month away. Do not delay starting the process. There will be paperwork to be completed and it may take longer than you anticipate. Contact the custodian of your defined contribution plan immediately so you do not miss this important deadline due to administrative paperwork demands.
Unless there are significant tax updates on the CARE ACT in late August, I will return to the saga of Joe Smalley in September.
Mary Owens, Founder, Owens Estate and Wealth Strategies Group, Financial Advisor, RJFS, 426 Sutton Way, Suite 110, Grass Valley.
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