Take advantage of Covid tax benefits using your IRA

In a previous blog in April, David Garcia and Mike Walsh discussed The Coronavirus Aid, Relief, and Economic Security (CARES) Act, which was signed into law by the president on March 26, 2020. The Act suspends required minimum distributions from IRAs, inherited IRAs, and defined contribution plans for the year 2020 (it is not applicable to defined benefit plans). If you had already taken a distribution from any plan other than an inherited IRA within 60 days prior to the passage of the law, you had the option of rolling over your distribution. Assuming you had not done any other rollovers in the past 12 months, the IRS allowed you to transfer some or all of the money you withdrew from your IRA within this 60-day period back into your IRA in one transaction. The law allows taxpayers to save on taxes on this income with the intention that this savings will help financially during the pandemic.

New Law

On June 23, 2020 the IRS made a new announcement that they are extending the 60- day rollover period to August 31, 2020. In addition to the rollover opportunity, an IRA owner or beneficiary who has already received a distribution from an IRA that would have been an RMD in 2020 can repay the distribution to the IRA as long as this transaction is completed by August 31, 2020. The announcement provides that this repayment is not subject to the one rollover per 12-month period limitation and that there is no longer a restriction on rollovers of inherited IRAs. This new law opened the possibility for taxpayers who took their distributions prior to the 60-day period and those who took distributions from inherited IRAs to qualify.

Options

If you have already taken your RMD this year and need the funds to live on (assuming you have no other after-tax money to pay it back) then you may not be able to take advantage of this opportunity.

If you have non-retirement accounts, you can use those funds to replace the distribution together with any taxes withheld, to potentially reduce your income for 2020. If your taxable funds are currently invested you want to make sure that any sales to liquidate funds for the rollover do not result in high realized gains, as this may negate some of the tax savings. If you must generate high gains to make the repayment/rollover, you may need to evaluate whether this makes sense from a tax perspective.

You may also want to evaluate whether to reinvest the rollover or leave the funds in cash since you will still have to take a distribution in 2021 (unless the law changes again). If you think you will be needing funds in early 2021, leaving the funds in cash or short-term investments may be the best alternative to avoid market volatility.

Custodians have still not developed a way to track these rollovers, so you will want to keep all documentation so that your accountant reports this transaction correctly on your 2020 tax return.

If you are in a very low tax bracket this year as a result of not having to take out your distribution, this may also be an opportunity to look at a Roth conversion. Also, you may want to make sure you don’t have any expenses or losses in 2020 that would be offset by the distribution. If you are able to withdraw the funds and remain in a zero or low tax bracket (for example, if you have high medical deductions for 2020) then rolling back the funds may not be your best option.

References:

https://www.schwab.com/resource-center/insights/content/can-you-forgo-taking-rmds-2020#:~:text=contribute%20the%20distribution%3F-,Yes.,the%20August%2031%2C%202020%20deadline.

https://www.irs.gov/pub/irs-drop/n-20-51.pdf

https://www.irs.gov/newsroom/irs-announces-rollover-relief-for-required-minimum-distributions-from-retirement-accounts-that-were-waived-under-the-cares-act#:~:text=WASHINGTON%20%E2%80%94%20The%20Internal%20Revenue%20Service,Act%20RMD%20waiver%20for%202020.