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What the SECURE Act tooketh away, the CARES Act has brought back, at least temporarily. As a reminder, the SECURE Act was signed into law in December 2019 effective for 2020 and going forward.  The best parts of the Act expanded contribution eligibility to IRAs and retirement plans and most notably, changed the mandatory distribution age from 70 ½ to age 72.  The “cost” of these more generous provisions is the elimination of the Stretch (Beneficiary or Inherited) IRA’s.

The previous benefit to the Stretch IRA was the ability for the non-spouse beneficiary to take distributions based upon their life expectancy which may have “stretched” distributions for decades, minimizing taxes and providing a lifetime income. The new law requires that in the majority of cases, the entire inherited IRA needs to be distributed within 10 years of the IRA owner’s death.  These laws also apply to 401(k) accounts and other defined contribution plans.  This radical change to inherited IRA’s has sent planners scrambling to reconsider tax and estate planning as a result of the 10-year mandatory distribution.

“Congress launched the largest stimulus bill in history in blistering speed to combat the economic and stock market fears of the Coronavirus pandemic,” said Irvin W. Rosenzweig CFP®, ChFC®, CLU®, CRPS®, AEP®, AIF®, President, Chief Investment Officer, RZ Wealth.

In my April blog, “Help Is On The Way!”, I wrote about the various stimulus efforts that Congress enacted through the CARES Act signed into law on March 27th.  Small business stimulus was provided through the Paycheck Protection Program (PPP) as well as additional emergency loan provisions. In addition to one-time payments to citizens within a certain income range, an expansion of unemployment benefits, and providing temporary Student, Home Loan and Renter relief, certain tax relief was also provided. Required mandatory distributions (RMD’s) were waived for 2020 under the assumption that these would burden retirement accounts that had suffered losses from the dramatic COVID- related bear market.

The problem was that by the time the law passed, those with required mandatory distributions had already taken or started taking their distributions, realizing unnecessary tax obligations.  Those who had taken their distributions had already missed the 60-day rollover deadline or would run afoul of the once-per-year rollover rule.

Luckily the IRS, yes, the IRS, came to the rescue in releasing Notice 2020-51.  In this notice, the deadline for rolling over 2020 RMD’s was extended to August 31.  The IRS went even further by allowing repayments of distributions that would have been in violation of the once-per-year rollover rule.

As a welcome surprise, the IRS has made an exception allowing repayments of RMD’s by non-spouse IRA beneficiaries, as long as it goes back to the same IRA.  This exception also includes any 2020 “year-of-death” RMD’s that an IRA owner hadn’t taken prior to death that are normally required to be taken by the beneficiary.  While this rule allows non-spouse beneficiaries to return RMD’s to IRA’s it does not extend to non-spouse beneficiaries of 401(k) plans. These plans are not offered the same relief.

Remember that in rolling funds back, to avoid all taxes on these distributions, any funds withheld for taxes will also have to be returned.  The IRS already has these funds so they will have to be made up with personal funds and noted as a credit toward taxes paid in order to qualify for a return of these funds once the taxpayer’s taxes are finalized.

Irvin W. Rosenzweig CFP®, ChFC®, CLU®, CRPS®, AEP®, AIF® 

Obviously, the clock is ticking with the deadline for rolling over or repaying distributions by August 31.  For those who haven’t taken their RMD or remaining balance of RMD, seriously consider waiving these distributions for 2020 to avoid unnecessary taxes.

In the case of our clients, here is our message, but we urge you to consult with your own financial and/or tax advisor as follows:

  • Determine if you have taken any RMD’s for the 2020 tax year, remember that in many cases RMD’s are automated and may be going directly to a bank account with taxes being withheld. Consult with your advisor on the return of these funds if they are not critical to your cash flow needs.  Non-spouse RMD’s will have to be returned to the actual IRA where funds were taken while all other RMD’s may be returned to any choice of IRA’s.  Make sure that these contributions are coded as rollovers by the institution that you are working with.  (Note that distributions and rollovers will have to be noted on your 2020tax return.)
  • If you haven’t taken your RMD’s or remaining RMD’s for 2020, consult with your advisor on waiving those requirements. In most cases, you have until late December to decide what course of action is in your best interest.  (For our clients, we feel that funds that aren’t really needed until December can wait until January of 2021 to create an entire new tax year plus extensions to have to contend with the taxes on those distributions.)
  • While Notice 2020-51 focuses on the return of RMD monies, there is also guidance on issues raised by the CARES Act waiver of RMD’s.  In particular, it clarifies that there will be no extension to the “five-year rule” or the “10-year payout rule” for beneficiaries of IRA owners that died in 2020.  As mentioned above, these changes for non-spouse beneficiaries have created obstacles to previous tax and estate planning that need to be explored thoroughly with your financial and/or tax professional.

To learn more about how RZ Wealth can help advise you on wealth management and your overall financial plan, please call us for a consultation at (610) 627-5921

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