Personal Finance, Tax Planning

What You Need to Know About 2020 IRA Distributions

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by Alli Thomas

Jul 23, 2020

In a recent post, we discussed the pros and cons of taking a required minimum distribution (RMD) in 2020.

Perhaps you, like many people, had either already taken their full or partial RMD by the time the CARES Act was passed. What are your options if you want to change your mind?

The IRS provided guidance on this situation in Notice 2020-51 on June 23. Here’s a quick summary.

 

IRA Distributions

If you took an IRA distribution in 2020 for an amount that would have qualified as a RMD, you can pay that amount back to the IRA.

Ordinarily, any non-spouse beneficiary of an inherited IRA is not permitted to roll over any distributions from that account. But, under this new guidance, rolling over this type of IRA is allowed.

If it’s your own IRA, the distribution is NOT subject to the 12-month rule that restricts rollovers from one IRA to another IRA.

The deadline to do this is August 31, 2020.

 

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Distributions From Defined Contribution Plans Like a 401(k)

If you took a RMD in 2020 from a defined contribution plan (which includes 401(k) and 403(b) plans) or an IRA, you may roll that distribution into a retirement account to avoid paying taxes on it.

This rollover IS subject to the 12-month rule for IRA-to-IRA rollovers, as well as the restrictions against rollovers by non-spouse beneficiaries of the inherited defined contribution plan.

The deadline to do this is also August 31, 2020.

 

Coronavirus-Related Distributions

You may roll over a coronavirus-related distribution (CRD) at any point within three years of the date of distribution. CRDs are also not subject to the 12-month restriction on IRA-to-IRA rollovers. If you’re a non-spouse beneficiary who took a CRD, you cannot roll it into an IRA–you can only repay it as outlined above (by August 31, 2020).

The IRS has generously reworked its qualification requirements for CRDs. Initially, it was limited to someone who had been diagnosed with COVID-19–or whose spouse had received the diagnosis–or someone who had been furloughed or laid off as a result of the virus.

Now, the definition of a qualified person has been extended to those people (plus their spouse and household members) whose hours had been reduced, or whose pay had been cut, or who lost childcare as a result of the virus.

 

What does this mean?

It means that many more people will qualify to receive CRDs. But, if you’re retired, you’ll probably only qualify for a CRD if you or your spouse was diagnosed with COVID-19 or if you live with someone who has been.

If you want to take advantage of this new guidance on distributions, remember the important date: August 31, 2020.

Need additional help? Our financial advisors can discuss your options with you in a free, no-obligation phone call. Click here to schedule a chat with one of them today.

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Alli Thomas

Alli Thomas has worked in the financial services industry for nearly 20 years, with a focus on retirement-related investing. She began her career as a FINRA-licensed participant-services call-center associate at Vanguard, and then moved to Principal Financial Group, where she worked closely with employers, assisting with retirement plan set-up and design, selecting appropriate plan investment offerings, and maximizing employee participation through targeted education campaigns and enrollment meetings. Alli has also worked as a qualified 401(k) administrator and registered investment advisor for several small investment firms. She now writes about all things investment- and finance-related, leveraging her extensive experience and passion for retirement planning to help investors make well-informed financial decisions.

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