What if I Already Took My 2020 RMD?

The CARES Act suspends required minimum distributions, or RMDs, for the year 2020 for all qualified retirement plans and IRAs. Presumably this component of the stimulus bill is intended to help retirees and beneficiaries who would otherwise be forced to take 2020 RMDs that were computed based on the bloated market values of Dec. 31, 2019, from retirement plans whose value was smashed by the coronavirus-triggered market plunge in 2020.

So, this one's easy, right? Just don't take an RMD in 2020 and move on to 2021. The devil is in the details that advisors will need to wrestle with, though. We can probably look back to the prior one-year suspension of RMDs (in 2009) to predict how this one will work.

A Correctable Mistake? Early birds who already took their 2020 RMDs may be kicking themselves because they didn't have to take it after all. Some early birds can cure this "mistake" by rolling over the distribution to an IRA.

Let's look at an example. Angela, 76, took her 2020 RMD from her IRA on March 15, 2020. An RMD, of course, cannot be rolled over. But because of the retroactive effect of CARES (retroactive for all of 2020), the distribution she already took is no longer an RMD ... it has been magically transformed into an "eligible rollover distribution."

Does that mean that anyone who already took his or her 2020 RMD can now just roll it right back into an IRA or another suitable retirement plan and continue deferring taxes? Not quite. There are a few bumps in the road.

More Than 60 Days Have Passed For someone who took his or her RMD in January 2020, for example, the 60-day rollover deadline has already passed. The IRS might grant a blanket extension of the rollover deadline for these pre-CARES RMD distributions as the IRS did for a somewhat similar (though not identical) situation that arose under the 2009 suspension. These early birds need to wait for such an IRA pronouncement.

Moreover, beneficiaries who already took their RMDs from an inherited retirement plan will not benefit from the suspension. A distribution from an inherited plan cannot be rolled over, even if it is not an RMD (unless the sole beneficiary is the surviving spouse of the deceased plan owner). CARES will help only those nonspouse beneficiaries who have not already taken out their 2020 RMDs.

The Once-Per-12-Months Rule Still Applies The once-per-12-months rule is one of the most confusing and treacherous traps in the Internal Revenue Code. Generally, a person who receives a distribution from his or her retirement plan or IRA can eliminate the tax on that distribution by contributing it (rolling it over) to an IRA within 60 days (provided the distribution is not an RMD and not from an inherited plan). The once-per-12-months rule is an insidious exception to this general rule: It dictates that an individual who receives an IRA distribution ("second distribution") cannot roll that distribution over into an IRA tax-free if within the 12 months prior to the second distribution the individual received another IRA distribution ("first distribution") that he or she rolled over tax-free into an IRA.

Suppose Angela, back in the summer of 2019, was dissatisfied with her IRA provider, so she moved her IRA to a different financial firm, and suppose she did this by means of a rollover: She closed out the IRA at Firm A, got a check payable to herself on Aug. 1, 2019, and (within 60 days) deposited that check in a new IRA at Firm B. Since that was a distribution followed by a rollover, she is barred from doing another IRA-to-IRA rollover for any IRA distributions she receives within 12 months after Aug. 1, 2019 (the date of the first distribution). Thus, she is barred by the tax code from rolling the "RMD" she took from her IRA in March 2020 back into the IRA she took it from (or into any other IRA, for that matter).

Angela could have avoided this problem by using an IRA-to-IRA transfer instead of a distribution-followed-by-rollover transaction for her August 2019 transition from Firm A to Firm B. An IRA-to-IRA transfer is not considered a distribution (from the first IRA) or a contribution (to the recipient IRA), and there is no numerical limit on such transfers. It is strongly recommended that whenever money is being moved from one retirement plan to another, a plan-to-plan transfer (also called an IRA-to-IRA transfer or a trustee-to-trustee transfer) be used instead of a rollover.

Because Angela did not use the IRA-to-IRA transfer route, there is only one escape hatch from the once-per-12-months rule: If Angela is a participant in a qualified retirement plan (such as a 401(k) plan), she can roll her March 2020 RMD distribution into the qualified plan. There is no limit on the number of IRA-to-qualified plan rollovers (or qualified plan-to-IRA rollovers) a person can do within 12 months.

If Angela does not have a qualified plan she can roll her IRA distribution into, there is one other route to consider: She could contribute the March 2020 distribution to a Roth IRA. Such a "Roth conversion" is subject to the usual 60-day time limit for rollovers but is not considered an IRA-to-IRA rollover for purposes of the once-per-12-months rule. She will have to pay income tax on the converted distribution, but she's going to have to pay tax on that distribution no matter what. At least this way she will get some benefit (future tax-free growth) from her taxable distribution.

Where to read more: For tax rules mentioned here, see Internal Revenue Code sections 402(c)(3)(A) and 408(d)(3) and Rev. Rul. 78-406, 1978-2 CB 157; and Section 2203, "TEMPORARY WAIVER OF REQUIRED MINIMUM DISTRIBUTION RULES FOR CERTAIN RETIREMENT PLANS AND ACCOUNTS" of the "Coronavirus Aid, Relief, and Economic Security Act'" or '"CARES Act." For how the Treasury interpreted and applied the 2009 suspension of RMDs, see IRS Notice 2009-82, 2009-41 I.R.B. 491 (9/24/09).

Natalie Choate is an estate planning lawyer in Boston with Nutter McClennen & Fish LLP. Her practice is limited to consulting regarding retirement benefits. The new 2019 edition of Choate's best-selling book, Life and Death Planning for Retirement Benefits, is now available through her website, www.ataxplan.com, where you can also see her speaking schedule and submit questions for this column. The views expressed in this article may or may not reflect the views of Morningstar.