Tax and financial advice from the Silicon Valley expert.

For Seniors Only – IRS allows “undoing” an unneeded 2020 “required” retirement plan distribution

The CARES Act eliminated required minimum distributions for 2020.  (Distributions are still required for a defined benefit account, which is basically an employer-provided retirement annuity.)

As a general rule, you have to start taking distributions from a retirement account, like an IRA or a 401(k), when you reach age 72 (as amended by the SECURE Act.)  The required minimum distribution is computed based on your life expectancy each year.  This rule has been waived by the CARES Act for 2020.

If you don’t need the money for living expenses, it’s best not to  take money out of a retirement account, so that it can continue to enjoy tax-deferred growth.  (If you do need the money for living expenses, this discussion doesn’t apply to you.  There’s no requirement to roll over what would otherwise be a required minimum distribution.)

Without this exception for 2020, distributions that are required minimum distributions wouldn’t be eligible for a rollover to an IRA or other qualified retirement account.

The elimination of required minimum distributions created a problem for some taxpayers.  Taxpayers usually can only roll over one distribution in a 12-month period.  Many retired persons take their distributions in monthly installments to make it easier for them to budget funding their expenditures.

In addition, rollovers usually must be completed within 60 days.  The IRS previously extended the due date to complete a rollover for a distribution made during the period from February 1, 2020 to May 16, 2020 to July 15, 2020 with Notice 2020-23.

Now the IRS has announced more relief for retirement account distributions received during 2020 that would otherwise be required minimum distributions in Notice 2020-51.  Here is a URL for the Notice. https://www.irs.gov/pub/irs-drop/n-20-51.pdf

  1. The due date to complete a rollover of any distribution that would otherwise be a required minimum distribution during 2020 is extended to be not before August 31, 2020.
  2. Any distribution that would otherwise be a required minimum distribution paid during 2020 is not subject to the one rollover per 12-month period limitation.  In other words, if multiple payments have been received that would otherwise be required minimum distributions, the total of all of the payments can be rolled over.
  3. The IRS clarified that a plan participant with a required beginning date of April 1, 2021 (became age 72 during 2020), is not required to take an initial distribution on that date.  Unless there is a later tax law change, the plan participant will still have to receive a required minimum distribution for 2021 during 2021.  Any distributions made during 2021 will first be applied as required minimum distributions and will ineligible for a rollover.
  4. Even though no distribution is required when the required beginning date is April 1, 2020 or April 1, 2021, those dates will still be the required beginning date for every other purpose, such as determining how distributions must be paid after the death of the participant.

IRAs don’t have to be amended in order to receive a rollover contribution of required minimum distributions.  Employer-provided defined contribution retirement plans (like 401(k)s) do have to be amended to accept these rollover contributions.  Notice 2020-51 includes a sample amendment for a defined contributions plan to accept these contributions.

Notice 2020-51 clarifies that payments that are part of a series of substantially equal periodic payments under the “RMD method” (commenced before age 59 1/2) aren’t considered “required minimum distributions” for the 2020 waiver.  If the payments are stopped in 2020 (other than because of death or disability) prior to age 59 1/2 (or prior to 5 years from the date of the first payment), the cessation of the payments is a modification so that ALL of the payments made under the series are subject to an early distribution recapture penalty tax.

If you already received what would normally be required minimum distributions during 2020, consider rolling them over by August 31, 2020.

If you haven’t received what would normally be a required minimum distribution but have one scheduled for later this year, consider notifying the plan administrator to cancel the distribution.

Also consider that Roth conversions aren’t limited to one per year.  Considering the stock market has been soft, 2020 may be a good year to make one or more Roth conversions.

If you have questions about these matters or need help with your tax and financial planning, consult with your tax advisor and financial advisor.  You can also write to me at mgray@taxtrimmers.com.

 

 

 

IRS proposed regulations will keep more in retirement accounts

The IRS has issued proposed regulations relating to required minimum distributions from retirement accounts, including, 401(k), IRA and Roth IRA accounts.  (Proposed Regulations REG-132210-18, Proposed Regulations Section 1.401(a)(9)-9.)

The required minimum distribution is generally computed using a life expectancy table issued by the IRS, called the lifetime distribution table.  The life expectancy tables haven’t been updated for many years.  The proposed regulations include new life expectancy tables.

(If a taxpayer fails to take a required minimum distribution, the federal penalty is 50% of the undistributed amount.)

Since life expectancies have been increasing, required minimum distributions will be smaller using the proposed tables, potentially leaving larger balances to accumulate future earnings.  Bigger distributions can optionally be taken at the risk of exhausting the account before the employee or plan owner’s death.

The proposed regulations are proposed to be effective for retirement plan distributions for tax years beginning on or after January 1, 2021, provided they are adopted as final regulations by that date.

Required minimum distributions for a non-spouse beneficiary of a deceased employee or a deceased plan owner are based on the life expectancy determined using the Single Life Table of the beneficiary as of the date of death of the employee or plan owner, minus one for each subsequent year.  Under the proposed regulations, the beneficiary will be able to recompute his or her life expectancy as of the date of death of the employee or deceased plan owner using the new lifetime distribution table starting January 1, 2021.

 

Tax and financial advice from the Silicon Valley expert.