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    Required Distributions in 2020

    The IRS recently reminded practitioners and taxpayers about the August 31, 2020 time limit for returning required minimum distributions (RMDs) back to the original retirement plans. There were many temporary changes to retirement plan rules due to coping with Covid-19 under the CARES act in March 2020.

    What if a taxpayer already took an RMD for 2020? If an individual has already taken an RMD in 2020, including someone who turned 70 ½ during 2019, the individual will have the option of returning the distribution to their account or other qualified plan.

    Since the RMD rule is suspended for 2020 only, RMDs taken in 2020 are considered eligible for rollover. Therefore, RMDs can be rolled over to another IRA, another qualified retirement plan, or returned to the original plan. Rollovers can be made within 60 days of a distribution, or by August 31, 2020, if later.

    An IRA owner or beneficiary who has already received an RMD in 2020 can also repay the distribution to the distributing IRA no later than Aug. 31, 2020, to avoid paying taxes on that distribution.

    IRS Notice 2020-51 (PDF) also provides that the one rollover per 12-month period limitation and the restriction on rollovers to inherited IRAs do not apply to this repayment.

    The CARES Act provisions apply to most retirement plans, including traditional IRAs, SEP IRAs, SIMPLE IRAs, 401(k) plans, 403(b) plans, 457(b) plans, profit sharing plans and other defined contribution plans. The RMD suspension does not apply to qualified defined benefit plans.

    RMDs suspended for 2020. Required Minimum Distributions (RMDs) are now suspended for 2020 only for everyone with IRAs and 401(k)-type accounts (but not defined benefit plans) as a result of the CARES Act that became law in March 2020.

    What about younger taxpayers? If a taxpayer reaches 70½ in 2020 or later, the taxpayer has to take your first RMD by April 1 of the year after reaching the age of 72. For all subsequent years, including the year in which the taxpayer the first RMD by April 1, the RMD must be taken by December 31 of the year.

    Should a taxpayer still take a distribution in 2020 – even it is not required for this year? For very many taxpayers, taking a distribution in 2020 is a good strategy. Consider the following circumstances:

      1. A taxpayer may be in a very low tax bracket. Taking a distribution in 2020 would result in little or no federal income taxes. Taking a distribution in 2020 would have the effect of reducing the retirement balances eventually inherited by beneficiaries who are likely to be in higher tax brackets than the original taxpayer.
      2. A taxpayer may be in a higher tax bracket. Taking a distribution in 2020 would result in paying federal income taxes. However, future federal income taxes might be significantly higher if –
        a. The taxpayer is married with large retirement account balances. Eventually, one of the married couple will pass away, leaving the survivor to be a single taxpayer with lower standard deductions, and narrower tax brackets.
        b. Amounts left in a retirement plans which could have been withdrawn in 2020 will be taxed as ordinary income when eventually withdrawn. Taking an extra distribution 2020, paying federal taxes in the distribution, and putting the balance into a retirement investment account in mutual funds, or directly into dividend paying stocks, increases those non-retirement investment account qualified dividends and capital gains which are taxed at lower than ordinary tax rates.
        c. A distribution in 2020 can be made as a Qualified Charitable Distribution (QCD) directly to an organized charity. Contact the trustee/custodian of the retirement account to get the details and forms to make the distribution directly to the charity. Taxpayers DO NOT TAKE THE QCD DIRECTLY, instead it goes as a payment directly to the charity. The QCD should not be taxed to the taxpayer. QCDs are not listed as itemized deductions. In effect, QCDs are charitable contributions without being taxed, and without affecting standard or itemized deductions. To make a QCD, at taxpayer must have reached age 70 ½. The annual limit for a taxpayer is $100,000. However, a spouse can also make a QCD if at least age 70 ½. See more information about QCDs in our Feb. 20 2020 IAAI News Flash.
        d. 2020 is an election year. Depending on the outcome of federal elections, and future federal budget deficits, future federal income taxes could eventually be significantly higher. Retirement strategies are a significant issue for all tax practitioners and all taxpayers. Don’t miss opportunities to significantly reduce taxes, and to significantly increase investment gains and assets.

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