Updates to the RMD put-back rule: Should you return your distribution?

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If you have already taken the required minimum distribution (RMD) from an IRA account, you can reverse your withdrawal until Aug. 31. There may be advantages to doing so, depending on your financial situation.

Historically, once an investor with an IRA account reaches 70½ years old, they must begin taking an RMD annually from their IRA account. These mandated withdrawals allow the IRS to secure tax payments deferred from deposits into certain retirement accounts. In December 2019, the SECURE (Setting Every Community Up for Retirement Enhancement) Act raised the age requirement for RMDs to 72. When the CARES Act passed in March, it suspended RMDs from many types of retirement accounts for 2020. This applied to both traditional IRAs, inherited IRAs and several other types of retirement accounts.

But what happens if you already took some or all of your RMD for 2020? Is it advantageous to put it back?

On June 23, the IRS issued Notice 2020-51, which provides that distributions dating back to Jan. 1 are eligible to be rolled back into the corresponding IRA account. Accordingly, most distributions can now be undone and put back into the retirement account by Aug. 31. This repayment will be treated as a tax-free rollover and will not be subject to the “one-rollover-every-12 months” rule. Until the deadline, you are eligible to return all distributions to date in 2020.

Many investors have a certain percentage of their RMD withheld for taxes. The full amount of the RMD is eligible to be rolled back into the IRA account — the net amount received by the investor plus the amount withheld for taxes. Unfortunately, investors cannot knock on the IRS’s door and ask for their tax payments back (as much as we might like to). To take full advantage of this RMD put-back rule, the dollar amount allocated to taxes will need to be refunded by resources outside of what has already gone to the IRS for your tax payments.

Rolling your RMD back into your retirement account may be beneficial for you if you have the financial flexibility to meet your needs through resources outside of your IRA account. It may make sense to capitalize on this opportunity to recover some of the lost value of your account as a result of market volatility early in the year. But you will need to evaluate and act quickly before Aug. 31. It is uncertain if this change will be extended.

We are living in unprecedented times that are producing complex, constantly evolving legislation. As such, it’s critical to continue to discuss these and other considerations with your financial planning professional and tax adviser to see if there are steps you can take today to help better your financial position in the future.

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