The Coronavirus Aid, Relief, and Economic Security (CARES) Act waived required minimum distributions (RMDs) for 2020. However, as with any legislative change, many practical questions were left unanswered. The recently released IRS Notice 2020-51 provided significant clarification of broad RMD relief for both IRA owners and beneficiaries who don’t want to take a 2020 RMD.
RMD Waiver for 2020
In the first half of 2020, the IRS has given significant regulatory relief responding to the financial damage many citizens have experienced from the COVID-19 global pandemic. One significant change is the CARES Act waiver of RMDs for 2020. The question, “What if I’ve taken my RMD and don’t need it, can I repay it?”, had a variety of answers depending on circumstances and timing. Initial guidance was released in the form of IRS Notice 2020-23, which clarified some of the RMD and rollover relief for those who had already taken a 2020 RMD.
Unfortunately, IRS Notice 2020-23 provided limited recourse for those who took the RMD in January or as a stream of withdrawals, and it only applied to IRA owners. The recently released IRS Notice 2020-51 provided significant clarification of RMD relief for both IRA owners and beneficiaries who don’t want to take a 2020 RMD. Let’s cover two significant areas that impact IRA beneficiaries.
Non–Spousal Beneficiaries
First, the unprecedented allowance of repayments of 2020 RMDs taken by non-spousal IRA beneficiaries (Section III.D).* This provision waives existing rules that prohibit a non-spousal IRA beneficiary from rolling over distributions via an indirect rollover. This means an inherited IRA beneficiary who has taken an RMD for 2020 can now place that money back into that inherited IRA. There is no legislative provision allowing for indirect rollovers when it comes to inherited IRAs; however, with this notice the IRS will be abiding by those rules this year. The relief applies only to distributions that would have been an RMD if not for the CARES Act waiver of RMDs, and the repayment must be made to the distributing IRA by August 31, 2020. It will be treated as a 60-day rollover if repaid by August 31, 2020. This provision will apply only to inherited accounts for which the owner died in 2019 or prior.
The second provision is more of a clarification. Because RMDs are waived for 2020, a beneficiary of a decedent dying in 2019 would normally have to elect the life expectancy distribution by December 31, 2020, but that is now extended to December 31, 2021.
The extension is a delay of the Required Beginning Date (RBD). Previously, the deadline to elect life expectancy payments and to take post-death RMDs under the 5-year rule in Section 401(a)(9)(B)(ii) or the life expectancy rule in section 401(a)(9)(B)(iii) and (iv) normally is the end of the calendar year following the calendar year of the death of the employee or IRA owner. Q&A-2 of the Notice clarifies that if this deadline otherwise is the end of 2020, it is extended to the end of 2021. This is welcome relief for many clients who may not want to receive a 2020 beneficiary RMD. However, if the money is already spent and not easily replaced, many clients will need to accept the payment and subsequent taxes. However, certain individuals who might find themselves in a lower tax bracket in 2020 may prefer to keep the RMD and pay the taxes at a temporarily lower bracket and not have those funds impact future RMD’s. Remember, the deadline for repayment is August 31, 2020.