July 20, 2020
Following baseball umpiring protocol, the IRS reminds us that a pitch is not a strike against you until the IRS calls it a strike, especially as it applies to recently revised IRA rules in the Coronavirus Aid, Relief and Economic Security Act (CARES Act.)
Many older taxpayers with an Individual Retirement Account (an “IRA”) have a “required minimum distribution” (or “RMD”). This is the amount that has to be withdrawn from the IRA by the end of each year. It’s based on the value of the account at the end of the prior year, the age of the taxpayer, and other factors, such as whether the IRA was inherited.
The CARES Act, enacted in March 2020, waived the requirement for taxpayers to take RMDs for 2020.
But this left taxpayers who had already taken an RMD for 2020 down in the count before stepping to the plate. It appeared the IRS initially provided relief, but only to some taxpayers and in some instances. The initial grant of relief applied only to distributions taken on or after February 15th, 2020 – if you had taken one distribution from an IRA, you had until July 15th, 2020 to make a “rollover” of that distribution – the same or another IRA – as an “indirect rollover”. Taxpayers are generally only permitted one indirect rollover in a rolling 12 month period of time, so if you had done an indirect rollover in late 2019, you were stuck – you couldn’t take a distribution from early March 2020 and redeposit it under the initial relief.
After much criticism, the IRS has broadened the relief, in three important ways.
First – the relief is for any and all distributions taken after 2019 – not just one distribution. For example: if you had started a series of monthly distributions from your IRA, you could now redeposit all of those funds into an IRA, in effect, cancelling your 2020 distributions and resulting in no withdrawal for 2020 (consistent with the “no RMD required for 2020” portion of the CARES Act).
Second – the date to put those funds back into an IRA has been extended to August 31, 2020. So, if you had taken monthly distributions for six months in the first half of 2020, you have until the end of August to send the funds back. That added timing is very helpful as many asset custodians are still struggling to handle the volume of transactions in a distributed workforce environment.
Third – this entire “take all your distributions and put them back” transaction is not going to count as an indirect rollover for the one-in-12-months rule. That means more taxpayers will be able to take advantage of the relief.
Under prior guidance, had you done an indirect rollover in late 2019, you were barred from redepositing any of your 2020 distributions. Also, if you had done a redeposit of a 2020 distribution in April 2020, you were barred from doing any other indirect rollovers until April 2021.
Now the early birds who had already taken an RMD for 2020 get “an extra strike” – it’s like your first strike in baseball was a “do-over” and you still have the rest of your full at-bat.
*Always consult with your CPA and professional advisor on matters involving taxes.
Commerce does not provide tax advice or legal advice to customers. While we may provide information or express general opinions from time to time, such information or opinions are not offered as professional tax or legal advice. Consult a tax specialist regarding tax implications related to any product and specific financial situation.
Past performance is no guarantee of future results, and the opinions and other information in the commentary are as of July 16, 2020. This summary is intended to provide general information only, may be of value to the reader and audience, and may include the opinions of Commerce Trust, which are subject to change.
This material is not a recommendation of any particular security or investment strategy, is not based on any particular financial situation or need, and is not intended to replace the advice of a qualified attorney, tax advisor or investment professional. Diversification does not guarantee a profit or protect against all risk.
Data contained herein from third-party providers is obtained from what are considered reliable sources. However, its accuracy, completeness or reliability cannot be guaranteed, and is subject to change rapidly as additional information regarding the conditions which impact the represented subject matter may change.
Commerce Trust is a division of Commerce Bank.
Following baseball umpiring protocol, the IRS reminds us that a pitch is not a strike against you until the IRS calls it a strike, especially as it applies to recently revised IRA rules in the Coronavirus Aid, Relief and Economic Security Act (CARES Act.)
Many older taxpayers with an Individual Retirement Account (an “IRA”) have a “required minimum distribution” (or “RMD”). This is the amount that has to be withdrawn from the IRA by the end of each year. It’s based on the value of the account at the end of the prior year, the age of the taxpayer, and other factors, such as whether the IRA was inherited.
The CARES Act, enacted in March 2020, waived the requirement for taxpayers to take RMDs for 2020.
But this left taxpayers who had already taken an RMD for 2020 down in the count before stepping to the plate. It appeared the IRS initially provided relief, but only to some taxpayers and in some instances. The initial grant of relief applied only to distributions taken on or after February 15th, 2020 – if you had taken one distribution from an IRA, you had until July 15th, 2020 to make a “rollover” of that distribution – the same or another IRA – as an “indirect rollover”. Taxpayers are generally only permitted one indirect rollover in a rolling 12 month period of time, so if you had done an indirect rollover in late 2019, you were stuck – you couldn’t take a distribution from early March 2020 and redeposit it under the initial relief.
After much criticism, the IRS has broadened the relief, in three important ways.
First – the relief is for any and all distributions taken after 2019 – not just one distribution. For example: if you had started a series of monthly distributions from your IRA, you could now redeposit all of those funds into an IRA, in effect, cancelling your 2020 distributions and resulting in no withdrawal for 2020 (consistent with the “no RMD required for 2020” portion of the CARES Act).
Second – the date to put those funds back into an IRA has been extended to August 31, 2020. So, if you had taken monthly distributions for six months in the first half of 2020, you have until the end of August to send the funds back. That added timing is very helpful as many asset custodians are still struggling to handle the volume of transactions in a distributed workforce environment.
Third – this entire “take all your distributions and put them back” transaction is not going to count as an indirect rollover for the one-in-12-months rule. That means more taxpayers will be able to take advantage of the relief.
Under prior guidance, had you done an indirect rollover in late 2019, you were barred from redepositing any of your 2020 distributions. Also, if you had done a redeposit of a 2020 distribution in April 2020, you were barred from doing any other indirect rollovers until April 2021.
Now the early birds who had already taken an RMD for 2020 get “an extra strike” – it’s like your first strike in baseball was a “do-over” and you still have the rest of your full at-bat.
*Always consult with your CPA and professional advisor on matters involving taxes.
Commerce does not provide tax advice or legal advice to customers. While we may provide information or express general opinions from time to time, such information or opinions are not offered as professional tax or legal advice. Consult a tax specialist regarding tax implications related to any product and specific financial situation.
Past performance is no guarantee of future results, and the opinions and other information in the commentary are as of July 16, 2020. This summary is intended to provide general information only, may be of value to the reader and audience, and may include the opinions of Commerce Trust, which are subject to change.
This material is not a recommendation of any particular security or investment strategy, is not based on any particular financial situation or need, and is not intended to replace the advice of a qualified attorney, tax advisor or investment professional. Diversification does not guarantee a profit or protect against all risk.
Data contained herein from third-party providers is obtained from what are considered reliable sources. However, its accuracy, completeness or reliability cannot be guaranteed, and is subject to change rapidly as additional information regarding the conditions which impact the represented subject matter may change.
Commerce Trust is a division of Commerce Bank.
