IRS Guidance for 2020
The CARES Act eliminates the requirement to take distributions from retirement plans such as IRA’s and 401(k) plans in 2020. Not surprisingly, the legislation and related interpretation by the IRS was very confusing and left many wondering if they could undo an IRA or 401(k) plan distribution made in 2020 prior to the passage of the CARES Act and if so, how. Recently released IRS Notice 2020-51 has provided much needed clarification.
If you took a required minimum distribution from an IRA or 401(k) plan earlier this year you have until August 31st to return the distribution. It is that simple.
Here are answers to some frequently asked questions:
- Must required distributions received prior to August 31st be returned within 60 days of the distribution? No. The funds must be returned by August 31stregardless of when during 2020 the distribution was received. For example, a required distribution received in January of this year may be returned provided it is returned by August 31st.
- May a beneficiary of an inherited IRA return a 2020 required distribution or do these rules only apply to IRA owners? A required distribution from an inherited IRA may be returned by August 31st.
- If required distributions are taken on a monthly basis from an IRA or 401(k) plan may they be returned? Yes, the monthly distributions prior to August 31st can be totaled and returned in whole or in part.
- If a portion of a required distribution prior to August 31st had taxes withheld may the full amount be returned? Yes. Consider the following example: In January, Joe receives a $10,000 distribution from his IRA which at that time he believes is required. $3,000 of the distribution is withheld for Federal taxes and the balance of $7,000 is distributed to Joe. Joe can return $10,000 to the IRA. The $3,000 withheld for Federal taxes will continue to be treated as tax withholding.
- If you turned 70 ½ in 2019 and took your first required distribution by April 1, 2020 may the distribution be returned? Yes, the distribution may be returned by August 31st.
So now that you know that you can return an unneeded required distribution, should you? The answer depends on your unique circumstances. Assuming that you do not need the funds for daily living, then the answer in large part rests on whether the tax rate applicable to the distribution in 2020 would be higher or lower than the tax rate that would apply in the future. Individuals who have suffered a significant loss of income in 2020 because of the economic disruption caused by COVID-19, or for some other reason, should consult with their tax adviser to determine if it is advisable to take a retirement plan distribution in 2020 even though one is not required.
Should you have any questions regarding the recent ruling please contact us.