IRS Further Expands Rollover Rules Allowing Repayment of 2020 Waived RMDs
ComplianceTax & AccountingAugust 27, 2020

IRS further expands rollover rules allowing repayment of 2020 waived RMDs

Updated August 27, 2020

Overview

On March 27, 2020, the President signed the Coronavirus Aid, Relief, and Economic Security Act, also known as the CARES Act. Section 2203 of the CARES Act waives the required minimum distribution (RMD) rules for tax year 2020, including 2019 RMDs for individuals that attained age 70½ in 2019 which were due to be distributed between January 1, 2020 and April 1, 2020. Since then, additional guidance provided by the Internal Revenue Service (IRS) gives IRA owners and beneficiaries the opportunity to repay to an IRA amounts that under normal circumstances would have been an RMD for 2020, allowing these individuals to avoid paying tax on the distribution.

IRS Notice expands rollover relief

On June 23, 2020 the IRS released Notice 2020-51 which provides additional guidance on the repayment of waived 2020 RMD amounts. The Notice further extends the deadline to return RMD amounts and expands availability. The IRS also indicates in Notice 2020-51 that the repayment of waived RMD amounts to an IRA are treated as rollover contributions. On August 24, 2020 the IRS issued IR-2020-187 which provides additional insight as it relates to the August 31, 2020 deadline.

  • A waived RMD amount distributed and received from January 1, 2020 through July 2, 2020 may be rolled over on or before August 31, 2020, and:
    • The rollover can be made to another IRA, another qualified retirement plan, or returned to the original IRA or plan
    • The rollover is not subject to the 60-day rollover rule
    • An unlimited number of separately distributed waived RMD amounts can be rolled over (i.e., the distributions are not subject to the one-per year rollover rule)
    • The ability to roll over a waived RMD amount also applies to both spouse and nonspouse beneficiaries
  • If a waived RMD amount is distributed and received after July 2, 2020 and rolled over on or before August 31, 2020:
    • The rollover can be made to another IRA, another qualified retirement plan, or returned to the original IRA or plan
    • An unlimited number of separately distributed waived RMD amounts can be rolled over (i.e., the distributions are not subject to the one-per year rollover rule)
    • The ability to roll over a waived RMD amount also applies to both spouse and nonspouse beneficiaries
  • If a waived RMD amount is distributed and received after July 2, 2020 and rolled over after August 31, 2020 the normal rollover eligibility criteria defined below will apply:
    • The 60-day rule
    • The one-per-year rule, and
    • Nonspouse beneficiaries cannot complete a rollover

The five-year rule

The 2020 RMD waiver also affects beneficiaries that inherited an IRA prior to 2020 and elected the five-year rule. Under the five-year rule a beneficiary IRA generally must be closed by the end of the fifth year following the IRA owner’s death. The CARES Act extends the five-year period, which is determined without regard to 2020.

Example
Zane inherited an IRA in 2018 and elected to take distributions using the five-year rule. Under normal circumstances Zane would need to deplete the IRA by December 31, 2023, the end of the fifth year following the IRA owner’s death. However, the 2020 RMD waiver rules allow Zane to ‘skip’ 2020, providing him with an additional year to take distributions from the inherited IRA, and making the deadline to deplete the IRA December 31, 2024.

IRA owner notification

Notice 2020-51, Q&A 11 states that an IRA custodian/trustee must notify IRA owners that no RMD is due for 2020. One method of informing an IRA owner that there is not an RMD requirement for 2020 is by properly completing the 2019 Form 5498, IRA Contribution Information, and furnishing a copy to the IRA owner. Box 11 of Form 5498 is titled ‘Check if RMD for 2020’ and contains a check box. Notification to an IRA owner will be satisfied by not checking Box 11 on the 2019 5498.

Conclusion

The guidance provided in Notice 2020-51, has improved the usefulness of the 2020 RMD waiver rules in the CARES Act. Allowing amounts that under normal circumstances would have been considered RMD amounts in 2020 to be rolled over. August 31, 2020 is the deadline to complete a rollover of a waived RMD amount taken by an IRA owner or beneficiary (spouse or nonspouse) without application of the normal rollover rules (i.e., the 60-day and one-per year rollover rules). Additionally, a nonspouse beneficiary cannot complete a rollover of a waived RMD amount after August 31. Go to the Coronavirus-related relief for retirement plans and IRAs questions and answers page at IRS.gov.

For an opportunity to learn more about IRAs and other tax-advantaged accounts including Health Savings Accounts and Coverdell Education Savings Accounts, consider our on-demand video training offered on a variety of topics. Go here to learn more about training opportunities available to you, or you can call us at 1-800-552-9408.

Diana Theis
Senior Specialized Consultant, Tax Advantaged Accounts
With more than 30 years of experience, Diana has worked closely with hundreds of financial organizations to help them create, implement, and maintain their tax-advantaged accounts program.