IRS guidance explains CARES Act RMD waivers and rollover opportunities
The CARES Act allows taxpayers to waive required minimum distributions (RMDs) for 2020. Learn which RMDs are eligible and the date for repayment.
The CARES Act allows taxpayers to skip required minimum distributions (RMDs) for 2020. IRS news release IR-2020-127 and Notice 2020-51 provide guidance on RMD waivers, including an opportunity for taxpayers who took RMDs before passage of the CARES Act to repay the distribution.
In general, taxpayers who reach a specific age must take RMDs from IRAs, defined contribution plans such as a 401(k) plan, a 403(b) plan, and certain 457 plans. Prior to the SECURE Act, the required beginning date (RBD) was no later than April 1 of the year following the year the taxpayer attains age 70½. Under the SECURE Act, for taxpayers who turn 70½ in 2020 or later, the RBD is April 1 of the year following the year the taxpayer attains age 72. Taxpayers who continue working for the employer sponsoring their retirement plan may postpone their first RMD from that employer’s plan to April 1 of the year after they retire. After the first RMD, taxpayers must continue taking RMDs each year by December 31.
Different required minimum distribution rules apply to inherited IRAs and retirement plans. Prior to 2020, IRA and retirement plan non-spouse beneficiaries were required to begin distributions over a prescribed period of time, starting with the year after the account holder died. Otherwise, the entire account balance had to be distributed within five years of the account holder’s death.
CARES Act RMD waiver applies to 2020 RMDs
Under the CARES Act, 2020 RMDs are waived as follows:
- RBD 2019 or earlier (taxpayer turned 70½ or retired 2018 or earlier). The taxpayer is not required to take a distribution in 2020.
- RBD by April 1, 2020 (taxpayer turned 70½ or retired in 2019). If the taxpayer did not take the first RMD in 2019, the taxpayer is not required to take a distribution in 2020.
- RBD by April 1, 2021 (taxpayer turned 70½ before 2020 but retired in 2020). The taxpayer is not required to take a distribution by April 1, 2021.
- Beneficiaries of IRAs and retirement plans are not required to take a distribution in 2020.
Note that RMD waiver is an option; taxpayers who want to start or continue distributions in 2020 may do so.
Also, under the CARES Act, the five-year period is determined without regard to 2020. For example, if a beneficiary inherited an IRA in 2018 and did not start minimum distributions by December 31, 2019, the entire IRA balance would ordinarily have to be distributed by December 31, 2023 under the five-year rule. Because 2020 is disregarded, the account balance must be distributed by December 31, 2024 instead.
Rollovers are permitted until August 31, 2020
Since the CARES Act passed March 27, 2020, taxpayers may have already taken 2020 RMDs earlier in the year. Normally an RMD is not an eligible rollover distribution. Notice 2020-51 permits taxpayers who prefer to waive 2020 distributions to roll over their distributions.
- Even though the 60-day rollover deadline may have passed in many instances, taxpayers have until August 31, 2020, to roll over 2020 distributions they prefer to waive.
- Some plan participants receive RMDs in a series of monthly or other periodic payments. All payments distributed that would have been RMDs are eligible for rollover.
- Employees with an RBD of April 1, 2021 (for taxpayers who turned 70½ before 2020 but retired in 2020 and received one or more payments from an employer plan) who receive payments in 2020 that would have been RMDs are eligible for rollover.
- Likewise, distributions from IRAs that would have been RMDs may be repaid (rolled over).
- Because the SECURE Act passed very late in 2019, some taxpayers who turned 70½ in 2020 may have mistakenly taken an RMD early in the year. The rollover provision applies to these taxpayers as well.
- Amounts that are rolled over under this provision do not count toward the one rollover per 12-month period limitation.
See Notice 2020-51 for FAQs on other aspects of RMDs and rollovers, including options for inherited plans, withholding rules, and a model defined contribution plan amendment.
Originally published in the 7/8/20 edition of TAX in the News