On June 23, the Internal Revenue Service issued a notice that told taxpayers they could unwind any required minimum distributions from their retirement accounts that they had taken in 2020. This provides a significant opportunity for IRA beneficiaries who didn’t need this money for expenses. They can put these distributions back into their IRAs to grow there tax-deferred, lowering their total tax bill.

Required Minimum Distributions

In general, IRA beneficiaries who are at least 72 years old (or 70½ if they were born before July 1, 1949) are required to take a certain fraction out of their regular IRAs each year. Because these traditional IRA assets haven’t been taxed yet (they were deductible going in or were rolled over from a 401k that was deductible), those distributions are taxed as ordinary income. That means a big tax bill.

RMDs Suspended for 2020

In response to the COVID-19 pandemic, the CARES Act was passed on March 27, suspending required minimum distributions for 2020. For taxpayers who hadn’t yet taken their RMDs, that meant they could let this money stay in their IRAs – continuing to grow there tax-deferred – and that they would avoid having to take a taxable distribution.

Of course, some taxpayers needed the money, and so they had to take the distribution and pay the tax regardless. However, for those who didn’t, it was a big opportunity.

Unfortunately, it was too late for some taxpayers. Many had already take their required minimum distributions in 2020 by the time that law was passed, before they knew that those distributions were no longer required. For some, they had a solution: they were able to use the 60-day rollover period, in which distributions can be returned to an IRA if done within that 60-day window.

Others had already exceeded that window. Sixty days had passed, so it was too late.

Still others never had that option to begin with: the 60-day rollover period doesn’t apply to inherited IRAs, and these beneficiaries were simply out of luck.

New IRS Notice Brings Additional Relief

Out of the blue, the Internal Revenue Service has announced that they have changed the rules to make things fair for these taxpayers and allow everyone to require their required minimum distributions into their IRAs. The distributed amounts need to be returned by the end of August.

Some taxpayers may have withheld taxes on those distributions already. Those withheld taxes can be applied against other income for 2020 or can be recovered as a refund after 2020 tax returns are filed next year.

This rule should provide welcome relief to a select group of investors who took required minimum distributions early in 2020 and previously had few options for changing this. Any Wealthspire Advisors clients with questions about this change should reach out to their advisor team.

Wealthspire Advisors is the common brand and trade name used by Sontag Advisory LLC and Wealthspire Advisors, LP, separate registered investment advisers and subsidiary companies of NFP Corp.
This information should not be construed as a recommendation, offer to sell, or solicitation of an offer to buy a particular security or investment strategy. The commentary provided is for informational purposes only and should not be relied upon for accounting, legal, or tax advice. While the information is deemed reliable, Wealthspire Advisors cannot guarantee its accuracy, completeness, or suitability for any purpose, and makes no warranties with regard to the results to be obtained from its use. © 2020 Wealthspire Advisors

Michael Delgass, J.D.

Mike is a managing director, a member of the executive committee, and serves as head of our New York office.