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Squire provides complete and personalized tax management and planning solutions to meet your needs.

Blog

Squire provides complete and personalized tax management and planning solutions to meet your needs.

Action Required by August 31, 2020 to Roll Over Unneeded Retirement Distributions

By Jim R. Beaudoin, Tax Partner, CPA, PFS, CFP

Generally, owners of retirement accounts (typically IRA’s, 401k’s, and 403b’s) are required to start taking withdrawals from their accounts when they reach 70 ½ years of age. The required minimum distribution (RMD) is the minimum amount that must be withdrawn from the account each year, in order to avoid a 50% tax penalty of the required amount.

However, due to changes made by the SECURE Act that was enacted December 20, 2019, if your 70th birthday is July 1, 2019 or later, you don’t have to start taking withdrawals until you reach age 72. All beneficiaries of inherited accounts, regardless of age, are required to receive RMDs, with special rules being applied to spouse beneficiaries.

In response to the COVID-19 pandemic, Congress enacted the CARES Act on March 27, 2020.  A provision of the Act eliminated the requirement to receive RMDs during 2020, retroactive to the start of 2020.  Many individuals receive RMDs as monthly distributions.  Those who have received RMDs this year before learning about the CARES Act, and who didn’t need the money, appeared stuck with unneeded taxable income unless they could qualify for the 60-day rollover provision.  However, owners are permitted only one rollover during any 12-month period and beneficiaries are not permitted to roll over distributions.

The IRS extended all tax deadlines due from April 1, 2020 through July 14, 2020 until July 15, 2020 in Notice 2020-23.  Therefore, if an owner could qualify for the 60-day rule and the 60th day fell into this time period, the rollover period was automatically extended to July 15, 2020. On June 23, 2020 the IRS issued Notice 2020-51 that allows both owners and beneficiaries to roll over all unneeded RMDs and avoid taxation—regardless of the 60-day rule—if the rollover is accomplished by August 31, 2020.  This proves to be beneficial, especially to beneficiaries who are typically unallowed by statute to roll over a distribution.

Taxpayers should consider their 2020 tax position before rolling over distributions.  If your marginal tax rate is lower in 2020 than usual (e.g. because of the economic impact of the Coronavirus), a better decision may be to keep the distribution, and perhaps receive even more retirement distributions or to make a Roth conversion that would allow you to pay tax at a lower rate than what might be paid in the future.

Don’t be overwhelmed by the constant change in deadlines, requirements and options—a multi-year tax analysis can provide you the information needed to make the right decision.  Squire professionals are available to assist you with this analysis and to answer any questions you might have regarding retirement distribution planning.