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Skipping a mandatory distribution from your IRA? What you need to know

This year, the coronavirus relief law is letting savers bypass mandatory withdrawals from their retirement accounts.

While that’s good news, it’s still generating plenty of questions from account holders.

Generally, savers who turn 70½ must begin annual required minimum distributions, or RMDs, from their retirement accounts and pay taxes on those withdrawals.

However, the coronavirus aid bill that was signed into law on March 27 eased rules around retirement accounts. 

In addition, the Secure Act, which took effect at the start of 2020, raised the RMD start age to age 72.

If you were required to take an RMD, either because you’re of the appropriate age or you’ve inherited a retirement account, you can skip it in 2020.

“The whole year is a grace period,” said Ed Slott, CPA and founder of Ed Slott & Co. in Rockville Centre, New York. “It’s just waived for this year.”

Here are a few common questions and answers on how this RMD waiver works.

Which accounts get relief in 2020?

Holders of traditional individual retirement accounts, or IRAs, and defined contribution plans (including 401(k), profit-sharing plans and 403(b) plans) may take a pass on their required distributions.

Owners of Roth 401(k) plans also generally have to take RMDs once they hit the appropriate age, but this year they are exempt, as well.

Roth IRA owners aren’t subject to RMDs during their lifetime.

Inherited IRAs are also normally subject to RMDs. If you inherited the account prior to 2020, you’re required to take distributions based on your own life expectancy.

Beneficiaries who inherit this year and later are required to draw down the inherited account in 10 years, due to the Secure Act.

However, beneficiaries of inherited IRAs can skip the distribution this year only.

I was supposed to take my first RMD by April 1, 2020. What do I do?

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If you turned 70½ in 2019, you had until April 1 of this year to take your very first RMD. You also would have to take your 2020 distribution by the end of this year.

Procrastinators get a gift from the federal government: They get to skip both withdrawals this time.

“These are the lucky people who didn’t listen to people like me to tell them to take one RMD each year so you don’t double up in the second year,” said Slott. “If they didn’t listen and they didn’t take anything in 2019, they can waive the first two RMDs.”

I took my RMD earlier this year. Can I put it back?

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It depends.

If you redeposit the withdrawal into the IRA within 60 days of having taken the distribution and if you haven’t made rollovers from one IRA to another in the last 12 months, you can put the RMD back, according to Slott.

You’ll have to replace the taxes that were withheld from the withdrawal, too.

This is good news for people who took their distributions in late February and March, but not for those who took them early in the year.

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“When this came out late in March, it meant that if you took the RMD early in January, you’re stuck,” said Dave Du Val, enrolled agent and chief customer advocacy officer for TaxAudit. “You don’t get to roll it back in.”

Further, people who took inherited IRA distributions earlier this year also can’t roll the money back in.

“If you took it from an inherited account, you can’t put it back unless the IRS comes up with relief guidance,” said Slott.

Can I still take the money out of my IRA, even if RMDs are waived?

Yes. In fact, since RMDs are waived for 2020, you might consider taking the withdrawal from your IRA and converting that portion to a Roth IRA, Slott said.

This way, you get the benefit of converting when tax rates and share prices are at their lowest.

Further, if you’re charitably inclined and you would normally give your RMD directly to charity — a tactic known as the qualified charitable distribution — you can still make this move with your IRA.

“You should be giving charitably through the qualified charitable distribution, but the only ones who qualify are IRA owners who are 70½ or older,” said Slott. “You have no RMD this year and you’re 71? Yes, you can still do it.”

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