In June, I let you know that you can return unwanted 2020 Required Minimum Distributions (RMDs) before August 31, 2020. This applies to RMDs taken from your IRA accounts and your Employer Sponsored Retirement Plan accounts. As a review, IRS Notice 2020-51 allows unwanted 2020 RMDs to be returned before August 31, 2020. That includes those RMDs taken in January, monthly RMD distributions, and RMDs taken from a beneficiary IRA. You can read IRS Notice 2020-51 at https://www.irs.gov/pub/irs-drop/n-20-51.pdf?inf_contact_key=941d4dc619941da023c4b73e9fea1364
I've had some phone calls since June and because the deadline is quickly approaching, I want to share answers to some of the questions I have been asked.
Q: “I took my required minimum distribution and withheld taxes. How does that work?”
A: If you don’t want to be taxed on any of the RMD paid to you, you must return the gross distribution amount – the amount before taxes were withheld. The taxes that were withheld will be a down payment toward your ultimate 2020 tax liability. When you file your 2020 return, if the total amount of tax withheld is more than the tax you owe, you can either apply the excess to your 2021 tax liability, or you can receive a refund.
Alternatively, you may wish to speak with your tax preparer for advice about using one of these strategies:
- If you have taxes withheld from other income, you could reduce the withholding on that income stream for the rest of 2020. But, don’t forget to adjust it back in January 2021.
- If you are making quarterly estimates, you could reduce your remaining estimated tax payments to take into consideration the anticipated overpayment.
Q: “I would like to return only part of the distribution I received. Is that possible?”
A: Yes. If you don’t want to return the full amount of your gross distribution, you can return the net amount you received, or any other smaller amount that is comfortable for you. You will be taxed on the portion that you do not return. The taxes that were withheld will be a down payment toward your ultimate 2020 tax liability.
Q: "Do I need to return the RMD to the same plan or IRA from which the RMD was paid to me?"
A: No. In fact, some plans may not allow you to return the RMD to the plan, requiring you to “return” those distributions into an IRA account. Consult with your plan or IRA custodian to see what they will allow.
Most IRA custodians will require you to complete an Indirect Rollover Request form (or something similar) to accompany your returned RMD. Contact your IRA custodian BEFORE you attempt to return your RMD to be sure of the IRA custodian’s specific requirements.
Q: "My RMD is set up to pay me automatically after August 31st. Do I have to stop the payment?"
A: You should contact your IRA Custodian. Some custodians have turned those payments off, and some are going to send them out as planned unless they have a request from you to stop the payment. Contact your IRA Custodian to be sure it does not get paid if you do not want to take your RMD.
Q: "I am taking my RMD monthly. Can I return what I have received in January through August, but keep the payments for September through December?"
A: Yes, you can return payments you have received in January through August before August 31. If your monthly payments are paid to you at the end of the month, you may wish to stop the August payment because you cannot return what you have not yet received. If your IRA custodian allows, you can either stop the payments for the balance of the year or keep the checks coming. It is up to you. You cannot return in August, payments you expect to receive in September through December.
Q: "If I took a distribution that was more than my RMD, can I return that, too, by August 31, 2020?"
A: No. Any distribution you took that was not an RMD must still abide by the one-rollover-per year rule and the standard 60-day rollover rule.
Q: "By when does the RMD need to be returned, if I am electing to return my 2020 RMD?"
A: The RMD must be returned on or before August 31, 2020. I suggest you NOT wait until August 25th to work on this. Start working on it NOW. Things may not go as quickly as you would think. Many companies are still working remotely and with reduced staffs. Telephone wait times are still long. Most custodians are requiring paperwork and a real check be mailed to them. That takes time.
If you would like to discuss this or anything else we can assist you with, please email me at firstname.lastname@example.org to schedule a time to talk or reach out to Danielle Martinez at email@example.com or via phone at 954-302-6324. If you get voicemail, your call will be returned as quickly as possible.
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