How the 2020 RMD Waiver Applies; Rollover Guidance Still Needed
By Dennis Zuehlke, CISP
The recently passed Coronavirus Aid, Relief, and Economic Security (CARES) Act waives 2020 required minimum distributions (RMDs) from IRAs (including Traditional IRAs, simplified employee pension (SEP) IRAs, SIMPLE IRAs, and inherited Roth IRAs) and defined contribution plans (such as 401(k) and 403(b) plans). The RMD waiver is part of the largest economic relief package in U.S. history, and is intended to help taxpayers whose retirement accounts may have been adversely affected by the economic downturn caused by the coronavirus (COVID-19) pandemic.
Understanding How the 2020 RMD Waiver Applies
Retirement plan participants and IRA owners, including beneficiaries, will not be required to take a 2020 RMD from their IRAs, inherited IRAs, or defined contribution plans. The RMD waiver also applies to account owners who reached age 70½ in 2019, but did not take their RMDs in that year, having chosen to delay their first payment until a date before April 1, 2020; they will not have to take their 2019 or their 2020 RMDs.
In addition, for IRA beneficiaries, 2020 is disregarded for purposes of the “five-year rule” for beneficiary distributions when IRA owners died before their required beginning date. Instead, one year is added to the five-year period. For example, if an IRA owner died in 2018, the assets in the inherited IRA must now be distributed by December 31, 2024, instead of by December 31, 2023.
It’s important to note that the new “10-year rule” for non-eligible designated beneficiaries under the Setting Every Community Up for Retirement Enhancement (SECURE) Act is not affected by this CARES Act provision. The 10-year period applies only to certain beneficiaries for deaths in 2020 and later years. If an IRA owner dies in 2020, the 10-year period would not start until 2021, the year after the year of the IRA owner’s death.
Rolling Over an RMD Already Taken; More Guidance Needed
President Trump signed the CARES Act into law on March 27, 2020, and some account owners may have already taken their 2020 RMDs. Now those individuals may want to roll the distributions back. By definition, RMDs are not eligible for rollover, but because RMDs are waived for 2020, any distribution that an IRA owner received in 2020—even with the intention that it was to be an RMD, now would be eligible for rollover, provided that all of the other rollover tests are met.
The IRS has not yet issued any guidance to address distributions that were taken before the RMD waiver was enacted and that were intended to meet the RMD requirement. After the SECURE Act was passed, increasing the RMD age to 72, the IRS issued Notice 2020-6 to provide RMD reporting guidelines. At that time, the IRS noted that it is considering what additional guidance should be provided with respect to a distribution to an IRA owner who will attain age 70½ in 2020 that was presumed to be—and taken—as an RMD. But to date, no additional guidance has been issued.
Until further guidance is issued, IRA owners who have already received a distribution may roll over the distribution if they meet the other rollover requirements:
it is within 60 days of the date of receipt of the distribution, or,
if the 60th day falls anywhere between April 1, 2020, and July 15, 2020, the distribution is rolled over by July 15, 2020.
As all of the other rollover tests must be met—including the one-per-12-month rule—IRA owners who have taken multiple distributions will be limited to rolling over only one of the distributions, provided that they have not rolled over a distribution in the preceding 12 months.
This is only the second time in the history of the U.S. retirement system that the RMD requirement has been waived. Previously, the Worker, Retiree, and Employer Recovery Act of 2008 waived 2009 RMDs in response to the 2008 financial crisis. At that time, the IRS issued Notice 2009-82 to extend the 60-day rollover period for any distribution that was taken under the assumption that it was a 2009 RMD. However, the IRS did not waive the one-per-12-month IRA-to-IRA rollover rule, so no more than one distribution was eligible for rollover. While the IRS issued guidance in 2009, there is no certainty that the IRS will issue additional guidance this time, and if it does, whether it will mirror the previous guidance. But it should be noted that recently-proposed legislation to provide additional COVID-19 pandemic relief included a provision that would permit multiple rollovers of waived RMDs within a 12-month period, as well as waiving the 60-day deadline for such rollovers.
Notifying Clients and Letting Them Choose
Like many financial organizations, yours may now be faced with how best to implement the 2020 RMD waiver within your IRA program operations. Your organization will likely base its response on how it normally handles RMD payments. Although 2020 RMDs are waived, and there is no requirement to make RMD payments to account owners, your financial organization would be well-advised to notify clients of the 2020 RMD waiver. Inform them of how any scheduled RMD payments will be handled, and be sure to get direction from them if they want to proceed in another manner. This is especially true if your financial organization automatically pays out RMDs unless account owners opt out.
In many cases, your clients typically may withdraw more than the RMD amount, which indicates that they are using these distributions to supplement their retirement income. These same individuals may want to continue to receive payments despite the 2020 RMD waiver. On the other hand, those who normally take their RMDs only because they are required to by law may welcome the relief and want to stop any payments. If your organization does continue payments to account owners when no RMD is required, consider warning them that they may not be able to roll over the distributions later.
