Investor Alert

June 30, 2020, 9:24 a.m. EDT

Do you regret taking a distribution from your retirement plans? The IRS says you can give it back

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The Internal Revenue Service just made it easier for people to give back the required minimum distributions from their retirement plans they may have taken too soon this year. 

Americans were told they did not have to take required minimum distributions this year as part of the CARES Act , the stimulus package aimed at helping people and businesses overcome financial hardships the crisis caused. Typically, retirees have a 60-day rollover period for distributions from certain retirement accounts. Under the new rule, Notice 2020-51 , that rollover period has been extended to Aug. 31 — meaning anyone who took an RMD beginning Jan. 1 can roll it back into their accounts.

The rule applies to qualified retirement plans, such as 401(k) and 403(b) plans. The extension also applies to any owner or beneficiary of an individual retirement account who received a distribution. The transaction is not subject to the one rollover per 12-month period rule IRA account holders usually have. “This is very generous,” said Martin Davidoff, partner-in-charge of national tax controversy practice at Prager Metis CPAs.

See: We have $190,000 in retirement savings and want to use the COVID-related distribution rules to pay off $40,000 in debt — should we?

Required minimum distributions are determined by numerous factors, including the age of the individual, his or her life expectancy and the account balance. People who turned 70 ½ in 2019 were required to take their first RMD by April 1 of this year prior to the passing of the CARES Act. 

Eliminating the need for an RMD this year allows Americans to keep money in their accounts that they may not have wanted to distribute, as well as save on taxes or any negative repercussions from market volatility this year. The ruling may not affect a large population, Davidoff said, but it’s beneficial for those who do apply. 

The Secure Act — sweeping retirement legislation passed in December 2019 — changed the age requirement for future transactions to 72 years old, so anyone turning 70 ½ years old in 2020 will be required to take his or her RMD by April 1 of the year they turn 72 years old. 

All RMDs after the first one is taken are supposed to be made by Dec. 31. Failing to take an RMD results in a hefty penalty — 50% of the amount that should have been distributed. (In other words, if someone’s required minimum distribution was $2,000 and she didn’t take it, she’d be subject to a $1,000 penalty). 

The government has made a few other changes for retirement savers and retirees in light of the health and economic crises spurred by the coronavirus. The CARES Act increased the amount of money Americans can withdraw or borrow from their retirement plans if they were adversely affected by COVID, such as falling ill or losing a job. The IRS announced last week it was expanding eligibility requirements for those distributions and loans, including people who suffered a rescinded job offer, delayed start date or live in a household with someone negatively impacted.

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