If you took out a required minimum distribution from your retirement account before the CARES Act took effect, you have more time to undo it.
The Internal Revenue Service enacted guidelines this week allowing any taxpayer who took the distribution since January to roll it back into their retirement account by Aug. 1. Previously, taxpayers had a 60-day window to do this after the CARES Act was signed into law on March 27.
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This change applies to both beneficiaries and retirees who turned 72 as of Jan. 1, 2020.
“The rules basically say that even if you have not been impacted by COVID, if you have taken money out of your IRA, you can get it back in to an IRA by August 31, 2020 with no questions asked and those rollovers will not count towards your one rollover per 12-month period,” said Jon Swanburg, director of financial planning at Tri-Star Advisors Inc. “This provision ends in approximately two months.”
Experts said the guidelines will especially benefit those who have not saved enough for retirement.
“Being able to reinvest an RMD they already took out will allow them to save more for the years when they are no longer working,” said Mitchell Kraus, cofounder at Capital Intelligence Associates, a financial advisory firm. “This will especially help those who are still working because they have not saved enough for retirement by allowing their retirement plan to continue to build tax-deferred.”
Benefits of a rollover
Required minimum distributions are annual amounts that must be withdrawn from their retirement accounts for those who turn 72 as well as beneficiaries. The amounts are determined based on the balance and life expectancy of either the retiree or beneficiary, according to the IRS.
But RMDs are taxed as ordinary income, so rolling them back into your IRA or 401(k) can lower your tax bill.
“The government uses RMDs in order to claim the tax revenue they did not get when the money was set aside,” Kraus said. “They deferred the taxes, but eventually need that revenue.”
Some retirees may benefit from returning their RMD if rolling it back qualifies them for a relief payment that they didn't already qualify for before, said Mark Smith, president of Vision Wealth Planning. Or, rolling it back could put them into a lower Medicare premium bracket.
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“We are running the tax numbers for clients to see what makes sense. Some clients already returned some of their RMDs under the original CARES Act,” Smith said. “We don't necessarily want to put it all back, depending on other income and tax bracket arbitrage between tax years.”
Other retirement changes
The IRS also recently announced that people who had a job start date delayed or an offer taken away due to the pandemic can also take up to $100,000 in retirement withdrawals penalty-free. The withdrawal is also tax free if the full amount is paid back within three years, starting in 2020.
Previously, only those who were laid off, had their hours reduced, or had their health affected were eligible for the break.