Anil Vazirani Scottsdale Investment Advisor shares A CARES Act RMD bonus for retirement savers

July 14, 2020Financial Advisor Scottsdale AzRetirement Planning Scottsdale

Anil Vazirani Scottsdale Investment Advisor shares A CARES Act RMD bonus for retirement savers

It’s the IRS to the rescue! Really.

The government agency has come through for those with retirement savings. Within one week in late June, the IRS expanded the relief Congress provided in the CARES Act, releasing guidance for returning unwanted required minimum distributions and expanding coronavirus-related distribution (CRD) provisions so that more U.S. taxpayers will qualify.

The happy result is that financial advisors are now in a position to help clients take advantage of the enhanced relief. Here are actionable takeaways from both IRS rulings.

Unwanted RMDs can now be undone

Even though the CARES Act waived all RMDs due in 2020, many savers had already taken our part or all of their RMDs earlier in the year before they knew about the waiver.

They then wanted to return those unwanted RMDs by rolling those funds back to their IRAs or company plans and eliminating the tax bill. But those efforts ran up against strict rollover rules.

But with IRS Notice 2020-51, released June 23, the IRS provided unprecedented blanket relief for most unwanted RMDs. In this one-off special, the ruling allows that RMDs taken to date in 2020 be returned (rolled back over) to retirement accounts. The agency also waived the once-per-year rollover rule and allowed non-spouse IRA beneficiaries to return unwanted RMDs. Despite the fact that both of these actions are contrary to the tax law, the IRS is allowing these returns as repayments.

Note however, that the relief (the ability to return the unwanted RMDs) only applies to the amount of the RMD withdrawn — and only if done by Aug. 31. After that time, all the regular rollover rules return.

For those who otherwise would not have been able to return the unwanted RMDs due to the once-per-year rule or because they were an IRA beneficiary, the repayment must go to the same account the funds were originally withdrawn from. However, beneficiaries of company plans, like 401(k)s, cannot return their unwanted RMDs.

The temporary waiver of the once-per-year rule also solves the problem of clients who have multiple RMDs, i.e. some who were taking monthly RMDs and were only able to return one of them. Under this new IRS guidance, they can, if they wish, return all of those RMDs — but again, if done by Aug. 31.

Advisors have asked me if the return of the unwanted RMDs could go to a Roth IRA as a Roth conversion. They can — except for IRA beneficiaries who cannot convert an inherited IRA to an inherited Roth IRA. The Roth conversion, of course, would be taxable and would have to be done by Aug. 31 unless the RMDs are still within a 60-day window. The once-per-year rule does not apply to Roth conversions, which is why an unwanted IRA RMD does not have to go back to an IRA.

On the other hand, if a 2020 RMD was already converted to a Roth IRA, that cannot be undone even under this relief, because a Roth conversion cannot be recharacterized.

Anil Vazirani is president of Secured Financial Solutions, independent insurance advisor investment advisor rep with a fiduciary obligation and in the financial services industry since 1994. A+ rating with the Better Business Bureau for over a decade and a half, members in good standing with the National Association of Insurance and Financial Advisors.

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