Answers to Important RMD Questions

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What type of accounts does the RMD suspension apply to?

This suspension applies to people with tax-deferred retirement accounts—including 401(k), 403(b), 457 and individual retirement accounts—who are subject to mandatory distributions. Those who contribute to tax-deferred retirement accounts don’t pay income tax on the money they put into these accounts. But starting at either age 70 ½ (for those born before July 1, 1949) or at age 72 (for those born after June 30, 1949), the government requires them to start withdrawing a set percentage annually of the balance and paying income taxes on the distributions. People who fail to do so could face a 50% penalty on the amount they should have withdrawn.

In 2020, account owners who are normally subject to required distributions can refrain from taking them. The same goes for beneficiaries who have inherited tax-deferred or Roth accounts, in which contributions are made with after-tax dollars and withdrawals are tax-free. Individuals with Roth accounts in their own names are always exempt from RMDs.

If I took a required distribution in 2020, can I put it back?

People who took required distributions since Feb. 1 may not have to wait for the IRS to issue that guidance. They may be able to use the so-called 60-day rule to return the money. To qualify, you normally have to put the money back within 60 days of receiving it. But the IRS on Thursday issued a notice that lets anyone who took an RMD between Feb. 1 and May 15 put the money back by July 15. Essentially, it gives the people in this group an extension to July 15 on the 60-day rollover deadline. For anyone who takes an RMD after May 15 the normal 60-day deadline applies. The option is off-limits to anyone who rolled over funds from one IRA to another within the past 365 days. (Rollovers from 401(k)s to IRAs, and vice versa are OK.)

If I already took an RMD and plan to put the money back, how can I get back taxes that were withheld?

Say you took a $30,000 RMD on Feb. 17 and asked your custodian to withhold $10,000 for taxes. You can return the $20,000 to a tax-deferred account and add another $10,000 from your pocket to “make up for the taxes that were withheld,” said Mr. Slott. To recoup the taxes, you can reduce your withholding or quarterly estimated payments or wait for a refund on your 2020 return. An alternative is to let the government keep the $10,000 tax payment and convert the $20,000 to a Roth IRA. You will need to do the conversion within 60 days of receiving the RMD (or by July 15 if you qualify for the extension.) Once in a Roth, the $20,000 can grow tax-free. Generally, the only beneficiaries with that option are surviving spouses. Under the rules as they stand right now, other beneficiaries can never put an RMD back,

How does the RMD suspension work for inherited accounts?

“Beneficiaries who have not taken an RMD can skip it,” said Ms. Choate. That includes the subset of beneficiaries who inherited accounts that must be drained within five years of the death of an account owner who died in the years from 2015 to 2019. For them, the five-year liquidation deadline becomes a six-year deadline, Ms. Choate said. Many who inherit retirement accounts this year have a 10-year window in which to take all the money out and pay the taxes due. This year’s RMD suspension will have no impact on that deadline, which is Dec. 31, 2030, said Mr. Slott.

https://www.wsj.com/articles/answers-to-important-rmd-questions-11586511002 (subscription)