What You Need to Know About the RMDs Deadline Extension

Contributed by: Robert Ingram, CFP®

To combat the economic impact of COVID-19, Congress passed the Coronavirus Aid, Relief, and Economic Security (CARES) Act on March 27, 2020.  The more than 2 trillion dollar stimulus package contained numerous provisions including an expansion of unemployment benefits, tax credit direct payments to qualified individuals, financial support to small businesses/healthcare facilities/state and local governments, and some changes to retirement account rules.  One of the provisions affecting retirement accounts was to suspend Required Minimum Distributions (RMDs) for 2020.  Individuals subject to RMDs for qualified retirement plans such as 401(k), 403(b) and IRA accounts are not required to take distributions this year (including beneficiaries owning inherited IRAs who were still subject to annual RMDs).

What does this suspension of RMDs mean for individuals who have already taken distributions prior to the CARES Act, but would not have if given the choice? If you have taken a distribution before March 27 is there a way to reverse or ‘undo’ the distribution?

Expanding The 60-Day Rollover Window For 2020

A retirement account owner that takes possession of a distribution from the account has 60 days from the date of withdrawal to complete a rollover into another eligible retirement account, for example, a rollover to an IRA.  Doing so excludes the distribution from income that could be subject to taxes and penalties.  This is referred to as the 60-day rollover rule; the IRS allows this one time per 12-month period. Please note that the one time per year rule does NOT apply to direct rollovers such a direct 401(k) rollover to an IRA.

Individuals who took a retirement account distribution prior to March 27 and were still within the 60 days since taking the distribution could have used the 60-day rollover rule to put their distribution back into their respective accounts, classifying it as a rollover.  However, this window was very limited.

In April, the IRS issued the first notice of guidance extending the 60-day rollover rule in 2020:

What qualified?

Distributions taken on or after February 1, 2020 could be rolled over into the retirement account.

When must the distribution be rolled over into the retirement account?

The later of

1. 60 days after receiving the distribution

2. July 15, 2020

This provided greater flexibility for individuals that had taken an RMD after January 31.  However, it still did not cover those that received an RMD in January.  Individuals that had already completed a once per year 60-day rollover within the last 12-months would also have been ineligible to use this rollover rule again to reverse their RMD.  In addition, this rollover window would not apply to non-spouse beneficiaries with inherited IRA accounts, since rollovers are not allowed for those accounts.

IRS Extends Rollover Deadline For All RMDs Made In 2020 To August 31st

In June, the IRS issued further guidance that essentially allows all RMDs that have been taken in 2020 to be repaid.  This IRS notice 2020-51 does the following:

• Rollover deadline has been extended to August 31, 2020 and covers RMDs taken any time in 2020.  This allows those who have taken RMDs as early as January to put the funds back into their retirement accounts by rolling over the funds if it is completed by August 31st.

• This rollover to reverse RMDs taken in 2020 does not count as part of the once per year 60-day rollover. This would allow individuals to use the rollover to prepay their RMDs regardless of whether they had already used a 60-day rollover within the last 12 months.

• Provides an exception allowing non-spouse beneficiaries to return RMDs to their Inherited IRAs in 2020.

A couple of points of note when considering repaying your RMDs taken this year

• The IRS notice 2020-51 only applies to distributions representing your Required Minimum Distribution amount.  Distributions other than your RMD amounts would be subject to the once per year 60-day rollover rule.

• If you had federal or state taxes withheld when you took your required minimum distribution, these amounts cannot be reversed and returned from the federal or state treasuries.  You could return your total gross RMD back to your retirement account, but it would have to be made out-of-pocket.  Any excess withholding would be resolved next year when you file your 2020 tax returns.

While reversing this year’s required minimum distributions may provide some great benefits such as potentially lowering your taxable income in 2020 or allowing for a Roth IRA conversion as an alternative, everyone’s financial situation and tax planning needs are unique.  For some folks, it could make sense to take RMDs if they expect higher income in the future that could fall in a higher tax bracket, for example.

Having a good conversation with your advisors can help you decide what is right for you.  As always, if you have any questions, please don’t hesitate to reach out!

Robert Ingram, CFP®, is a CERTIFIED FINANCIAL PLANNER™ professional at Center for Financial Planning, Inc.® With more than 15 years of industry experience, he is a trusted source for local media outlets and frequent contributor to The Center’s “Money Centered” blog.

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The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Raymond James does not provide tax or legal services. Please discuss these matters with the appropriate professional. Conversions from IRA to Roth may be subject to its own five-year holding period. Unless certain criteria are met, Roth IRA owners must be 59½ or older and have held the IRA for five years before tax-free withdrawals of contributions along with any earnings are permitted. Converting a traditional IRA into a Roth IRA has tax implications. Investors should consult a tax advisor before deciding to do a conversion.

Can you roll your 401k to an IRA without leaving your job?

Contributed by: Nick Defenthaler, CFP®

Typically, when you hear “rollover,” you think retirement or changing jobs. For the vast majority of clients, these two situations will be the only time they complete a 401k rollover. However, another option for moving funds from your company retirement plan to your IRA — the “in-service” rollover — is an often overlooked planning opportunity. 

Rollover Refresher

A rollover is simply the process of moving your employer retirement account (401k, 403b, 457, etc.) to an IRA over which you have complete control, separate from your ex-employer. If completed properly, rolling over funds from your company retirement plan to your IRA is a tax- and penalty-free transaction, because the tax characteristics of a 401k and an IRA generally are the same.  

What is an “in-service” rollover?

Unlike the “traditional” rollover, an “in-service” rollover is probably something unfamiliar to you, and for good reason. First, not all company retirement plans allow for it, and second, even when it’s available, the details may confuse employees. The bottom line: An in-service rollover allows an employee (often at a specified age, such as 59 ½) to roll a 401k to an IRA while employed with the company. The employee may still contribute to the plan, even after the completed rollover. Most plans allow this type of rollover once per year, but depending on the plan, you potentially could complete the rollover more often for different contribution types at an earlier age (sometimes as early as 55).

Why complete an “in-service” rollover?

While unusual, this rollover option offers some benefits:

More investment options: Any company retirement plan limits your investment options. You can invest IRA funds in almost any mutual fund, ETF, stock, bond, etc. Having options and investing in a way that aligns with your objectives and risk tolerance may improve investment performance, reduce volatility, and make your overall portfolio allocation more efficient.

Coordination with your other assets: Your financial planner can coordinate an IRA with your overall plan with much greater efficiency. How many times has your planner recommended changes in your 401k that simply don’t get completed? When your planner makes those adjustments, they won’t fall off your personal “to do” list.

Additional flexibility: IRAs allow penalty-free withdrawals for certain medical expenses, higher education expenses, first time homebuyer allowance, etc. that aren’t available with a 401k or other company retirement plan. Although this should be a last resort, it’s nice to have the flexibility.

Exploring “in-service” rollovers

So what now? First, always keep your financial planner in the loop when you retire or switch jobs to see whether a rollover makes sense for your situation. Second, let’s work together to see whether your current company retirement plan allows for an in-service rollover. That typically involves a 5-10 minute phone call with us and your company’s Human Resources department.

With your busy life, an in-service rollover may fall close to the bottom of your priority list. That’s why you have us on your financial team. We bring these opportunities to your attention and work with you to see whether they’ll improve your financial position! 

Nick Defenthaler, CFP®, is a CERTIFIED FINANCIAL PLANNER™ professional at Center for Financial Planning, Inc.® He contributed to a PBS documentary on the importance of saving for retirement and has been a trusted source for national media outlets, including CNBC, MSN Money, Financial Planning Magazine, and OnWallStreet.com.

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Rolling over your retirement assets to an IRA can be an excellent solution. It is a non-taxable event when done properly - and gives you access to a wide range of investments and the convenience of having consolidated your savings in a single location. In addition, flexible beneficiary designations may allow for the continued tax-deferred investing of inherited IRA assets. In addition to rolling over your 401(k) to an IRA, there are other options. Here is a brief look at all your options. For additional information and what is suitable for your particular situation, please consult us. 1. Leave money in your former employer's plan, if permitted Pro: May like the investments offered in the plan and may not have a fee for leaving it in the plan. Not a taxable event. 2. Roll over the assets to your new employer's plan, if one is available and it is permitted. Pro: Keeping it all together and larger sum of money working for you, not a taxable event Con: Not all employer plans accept rollovers. 3. Rollover to an IRA Pro: Likely more investment options, not a taxable event, consolidating accounts and locations Con: usually fee involved, potential termination fees 4. Cash out the account Con: A taxable event, loss of investing potential. Costly for young individuals under 59 ½; there is a penalty of 10% in addition to income taxes. Be sure to consider all of your available options and the applicable fees and features of each option before moving your retirement assets. Any opinions are those of Nick Defenthaler and not necessarily those of Raymond James. This material is being provided for information purposes only and is not a complete description, nor is it a recommendation. Investing involves risk and you may incur a profit or a loss regardless of strategy selected. Prior to making an investment decision, please consult with your financial advisor about your individual situation. Please note, changes in tax laws may occur at any time and could have a substantial impact upon each person's situation. While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors of RJFS, we are not qualified to re tax or legal matters with the appropriate professional. 401(k) plans are long-term retirement savings vehicles. Withdrawal of pre-tax contributions and/or earnings will be subject to ordinary income tax and, if taken prior to age 59 1/2, may be subject to a 10% federal tax penalty. Roth 401(k) plans are long-term retirement savings vehicles. Contributions to a Roth 401(k) are never tax deductible, but if certain conditions are met, distributions will be completely income tax free. Unlike Roth IRAs, Roth 401(k) participants are subject to required minimum distributions at age 70.5.