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Most-asked CARES Act questions

While the CARES Act does not grant a free rollover to everyone for every RMD dollar, subsequent IRS guidance in Notice 2020-23 further relaxed rollover restrictions, Ed Slott writes.
While the CARES Act does not grant a free rollover to everyone for every RMD dollar, subsequent IRS guidance in Notice 2020-23 further relaxed rollover restrictions, Ed Slott writes.
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The retirement provisions in the CARES Act may seem straightforward at first, but dig deeper into the legislation, and questions start accumulating.

The points I’ve been asked most about seem to center on waivers of RMDs for 2020 and the availability to clients of penalty-free withdrawals of up to $100,000 from retirement accounts for coronavirus-related distributions (CRDs).

Here are some of the specific and frequently asked queries I’ve been fielding:

What type of accounts are impacted by the RMD waiver?
The waiver applies to traditional IRAs and workplace plans like SEP, SIMPLE, 401(k), 403(b) and 457(b) plans. Defined benefit plans are not part of the waiver.

Does a client have the option to take a 2020 RMD?
Yes. Any withdrawal taken in 2020 will be treated as a voluntary distribution. Be aware that taxes will still apply, but the withdrawal can also be converted to a Roth IRA since it is no longer an RMD.

My client turned 70 ½ last year. His first RMD was for 2019, but his required beginning date was April 1, 2020. He elected to delay taking this first RMD until 2020. Is that RMD waived under the CARES Act?
Yes. The CARES Act also impacts 2019 RMDs for those who reached age 70 ½ in 2019 and had an RBD as of April 1, 2020. Any 2019 RMD amount not already withdrawn by Jan. 1, 2020, is waived.

We have many clients who receive RMDs automatically on a monthly schedule. Even though those clients already took a portion of their 2020 RMD, can they elect to stop the remaining payments?
Yes.

Earlier this year, my client took an RMD for 2020 from a traditional IRA. Then the CARES Act came along. Now she would like to have this RMD payment go into her Roth IRA instead, leaving the taxes paid exactly as is. Can this be done? It is beyond 60 days.
Usually, RMDs cannot be rolled over or converted to Roth IRAs. However, since the CARES Act waived 2020 RMDs, any RMD already taken in 2020 is no longer considered an RMD, which means it can be rolled over (i.e., converted) to a Roth IRA as long — and this is important — as it meets the 60-day rule.

OK, but if a client already received all or a portion of her 2020 RMD, can she return it to the IRA and eliminate the tax bill?
It depends. While the CARES Act does not grant a free rollover to everyone for every RMD dollar, subsequent IRS guidance in Notice 2020-23 further relaxed rollover restrictions. As of this writing, anyone who takes an RMD between Feb. 1 and May 15, 2020, has until July 15 to roll over the RMD payment. Future guidance could further expand rollover relief. For all RMDs received in January 2020 and after May 15, the 60-day deadline still applies.

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Under the act, the once-per-year rollover rule also still applies. If another IRA-to-IRA (or Roth IRA-to-Roth IRA) 60-day rollover was done in the previous 365 days, then the RMD cannot be put back. This means that if a person received monthly RMD payments in 2020, only one can be rolled over. Note that rollovers from employer plans to IRAs, and vice versa, do not count toward the once-per-year rule. This rule is unaffected by the rollover relief in Notice 2020-23. While the CARES Act waived 2020 RMDs from both inherited IRAs and Roth IRAs, they cannot be rolled over.

My client passed away in January without taking his 2020 RMD. I am working with his children to establish inherited IRAs. Do they need to take his year-of-death RMD?
No. Since the decedent passed away in 2020 when RMDs were waived, there is no year-of-death RMD to take. Beneficiary stretch rules under the SECURE Act will apply. Eligible designated beneficiaries inheriting in 2020 looking to stretch payments are unaffected by the CARES Act and will have their first RMD due in 2021. Non-eligible designated beneficiaries unable to stretch inherited payments under the SECURE Act are still bound by the standard 10-year payout rule. The 10-year rule does not become an 11-year rule.

Can I still do qualified charitable distributions for my clients even though their RMDs are waived?
Yes. QCDs can still be made even in years when no RMD is required. As long as clients are otherwise eligible (i.e., age 70 ½ or over), then QCDs from IRAs are still available in 2020 as a planning tool.

Are 72(t) withdrawal requirements waived for 2020?
No. This law does not apply to anyone taking early distributions under the 72(t) exception to the 10% early withdrawal penalty. Such 72(t) payments are not RMDs, even if they are being calculated using the RMD method. These schedules must continue as is for 2020. Any modification or failure to take the required payment could result in retroactive penalties.

Can I do a Roth conversion for my client or roll their 401(k) dollars into an IRA without taking the RMD first?
You can go ahead with the conversion and/or rollover without concern about taking the 2020 RMD prior to the transaction. In a normal year, the “first dollars out” rule dictates that the first money withdrawn from an IRA or a workplace plan is the RMD. These first dollars out, however, are ineligible for a rollover. However, since RMDs are waived, the first dollars out rule does not apply for 2020.

Will the government waive the 60-day rollover requirement and/or the once-per-year rollover rule?
Only time will tell. In 2009, the last time RMDs were waived, the IRS did eventually also waive the 60-day rollover requirement, but that guidance did not arrive until late in the year. In that instance, the IRS did not waive the once-per-year rule or allow non-spouse beneficiaries to roll over funds.

Do inherited IRAs fall under the waiver?
Yes. 2020 RMDs are waived for both inherited Roth and inherited traditional IRAs. For those IRAs inherited by non-designated beneficiaries (i.e., a charity, estate or non-qualifying trust) that are subject to the five-year payout rule, 2020 can be disregarded.

Must my client be negatively affected by the coronavirus for the RMD waiver to apply to him?
There are no prerequisites for the RMD waiver. It automatically applies to everyone who has an RMD from an impacted account.

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Do not confuse rules in the CARES Act for coronavirus-related distributions, or CRDs, with the RMD waiver — these are separate and distinct provisions. Frequently asked questions about CRDs follow.

What special tax relief is available for coronavirus-related distributions?
The CARES Act allows qualified individuals to take distributions of up to $100,000 penalty-free from their IRA or company plan during 2020. Further, it allows the distributions to be repaid to IRAs or plans and permits federal income tax on those withdrawals to be spread out over three years. The three-year repayment period begins the day after the date the funds were received.

Who qualifies for relief?
Unlike IRS relief for disasters like hurricanes and wildfires, this relief is available only to qualified individuals who have been:

  • diagnosed with the SARS-CoV-2 or COVID-19 virus by a test approved by the CDC;
  • whose spouse or dependent is diagnosed;
  • who experiences “adverse financial consequences” from being quarantined; being furloughed or laid off or having work hours reduced; or being unable to work due to lack of child care; or have closed or reduced hours of a business they owned or operated.

Can someone with both an IRA and company plan withdraw $100,000 limit from each?
No. The $100,000 is an overall limit. IRA and company plan withdrawals are aggregated for this purpose.

Are there any restrictions on how the CRDs are used?
Surprisingly, no.

When must the CRDs be taken?
CRDs can be taken at any time during 2020. This means that distributions taken between January 1, 2020, and March 26, 2020 — before the CARES Act date of enactment — also qualify.

Are CRDs taxable?
Generally yes, but CRDs can be repaid tax free. If they are not repaid, income can be spread over three years.

Can those age 59 ½ or over qualify for CRDs?
Yes. Although those individuals would not be subject to the 10% penalty anyway. They still get to repay the CRD or spread the income.

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RMDs RIAs Coronavirus IRAs Retirement withdrawals IRS Tax 401(k) Retirement income Roth IRAs CARES Act
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