Because You (Previously) Asked: Can I Repay my IRA for RMD’s I Took Before RMD’s Were Suspended Due to CARES Act?

What??? Welcome to the on-going “yo-yo effect” of legislation and rules that keep evolving.  We make plans and strategies, and then things get flipped on their heads, and we have to adjust, and then adjust again.  At least in this respect, we are not referring to those who are dealing with Covid-19, just some of the legislation and rules developed in response to it.

We previously wrote about the legislation contained in the CARES Act that affected individuals who are normally subject to taking Required Minimum Distributions (RMD) from their IRAs or other qualified types of accounts.  Because You Asked: When Will I Get My Money? (Info from the CARES Act- 3.31.20).  The new legislation allowed these individuals to forego their RMD’s this year, and it applied to individuals over 70 ½ as well as those who had inherited an IRA.

But a question remained: What if you already took your RMD between January and March 27th, when the new legislation was signed?

In April, the IRS announced that if you took an RMD between February 1 and May 15th, you had until July 15th to repay your IRA for the amount distributed.  However:

  • You were limited to paying back a single distribution, so this did not help those who take their RMD payments on a monthly basis, for example.
  • This repayment did not apply to those who had taken RMD’s from Inherited IRA’s. Those folks were stuck with their distributions.

Now, however, comes this headline:  

IRS announces rollover relief for required minimum distributions from retirement accounts that were waived under the CARES Act

What this clarification now means is that you have the option to repay your IRA for ALL of the distributions you have taken year- to- date, including payments from January, whether it was a one-time distribution or several, as long as it is paid back by August 31st, 2020.

Even more unusual, they have included those Inherited IRA’s as well in this provision, so now those RMD’s can be paid back as well.

Should You Consider Paying Your RMD Back to Your IRA?

Our standard answer is “It depends” because there is no responsible one-size-fits-all answer to that question.  Here are some considerations for making the best decision for you:

  • Do you have the funds available to pay back the RMD, including any taxes you elected to have withheld from your distribution?
  • Are you using your distributions to pay living expenses? You may not want to cut that off.
  • Did you elect to do a Qualified Charitable Distribution for all or part of your RMD? It won’t be feasible to try to take back a charitable distribution you made, nor would we recommend that.
  • Do you think that taxes will increase in the future? We certainly do; therefore, it might make sense to go ahead and continue with your planned RMD’s, if it is tax efficient for you, and it does not push you into those higher tax levels. (When we talk about tax efficiency, we mean planning your income and tax rates, paying a little in taxes over time, rather than having to pay a lot more later.)
  • If you do have the funds to repay your IRA, does it make more sense for you to do that, OR to take those funds and make a contribution to your Roth IRA instead?

These are all questions that should be taken into account with your needs and circumstances, and in consultation with your trusted advisors; just remember that you have to make a decision one way or the other by August 31st of 2020. If you do decide to re-pay your IRA, be sure to designate it as a “re-payment” on your contribution, and then keep good records for your taxes next year.  We have no idea how the custodians are going to track all of this, so keep your own records.

References:

Here is the link to the IRS notice for your review: https://www.irs.gov/newsroom/irs-announces-rollover-relief-for-required-minimum-distributions-from-retirement-accounts-that-were-waived-under-the-cares-act

The Wall Street Journal also had an article discussing this topic on June 23rd: https://www.wsj.com/articles/irs-provides-rmds-relief-for-retirees-11592935108?mod=searchresults&page=1&pos=1

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