Answers to the Questions We Hear Most Often
Times have been uncertain since the outbreak of the novel coronavirus (COVID-19), and questions abound. On March 27, 2020, the President signed the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) into law. The legislation, which contains more than $2 trillion of stimulus and relief measures, has been widely publicized, and provides Americans much needed assistance as we all cope with the COVID-19 pandemic.
The CARES Act also has several provisions that specifically impact IRAs to help provide relief for many Americans. To learn more, please continue reading the summary of changes regarding the IRA contribution deadline, RMD waivers and tax-advantaged distributions for those affected by COVID-19.
Extension of IRA Contribution Deadline
Q. Has the tax deadline been extended? What does that mean if I am due a tax refund?
A. The Department of the Treasury and Internal Revenue Service has postponed Tax Day. The deadline to file 2019 taxes is extended to July 15, from April 15, 2020. Anyone who has a refund coming is encouraged to file as soon as possible. The IRS announced that most tax refunds will be issued within 21 days.
Q. If the tax deadline has been extended, does that mean the IRA contribution deadline has been extended, too?
A. Since the IRS has extended the federal income tax filing date to July 15, 2020, the deadline to contribute to an IRA has been extended to July 15, as well.
Q. How do the changes to tax filing and IRA contribution deadlines impact tax forms that I may need?
A. Normally, Form 5498, which reports IRA contributions made for a tax year, must be filed with the IRS and sent to IRA owners by June 1. The IRS, in Notice 2020-23, has extended the time IRA custodians will have to prepare Form 5498 for 2019 to August 31, 2020.
IRA custodians will likely need to report some 2019 IRA contributions (those made on or shortly prior to July 15, 2020) on the 2020 Form 5498.
Waiver of 2020 Required Minimum Distributions
Q. What impact does the CARES Act have on Required Minimum Distributions (RMDs)?
A. This is where things get a little more complex. Here are the basics, and below are a few example scenarios that may make things more clear. Remember to speak with your tax and/or financial advisor to understand what makes sense for your specific situation.
First, the CARES Act waives the requirement to take a required minimum distribution (RMD) in 2020 and is available to all IRA owners and beneficiaries of inherited IRAs, not just those directly affected by the COVID-19 pandemic.
For IRA owners, RMDs must be taken when the owner reaches a certain age. This age is 70½ for individuals born before July 1, 1949 and age 72 for individuals born on or after July 1, 1949, as recently changed by the SECURE Act.
Example 1. Harry is 75 years old and has been taking RMDs out of his Millennium Trust IRA since he turned 70½. Harry is not required to take any distribution from his IRA in 2020.
Example 2. Maria reached age 70½ in 2019. She would have been required to take her first RMD from her Millennium Trust IRA no later than April 1, 2020. She did not take any distributions in 2019, and she would have been required to take her second RMD (for the 2020 tax year) by December 31, 2020. Maria is not required to take either RMD in 2020.* Note: If Maria had already taken her first RMD in 2019, she is not entitled to any relief for the 2019 RMD, but does not need to take the 2020 RMD.
Q. If I inherited an IRA, how do these RMD changes affect me?
A. The CARES Act waiver for RMDs in 2020 also applies to beneficiaries of inherited IRAs. If you are a beneficiary and would have needed to take an RMD in 2020, you no longer need to take that distribution.
Example 3. Jon inherited a Millennium Trust IRA from his mother in 2012 and has been taking RMD distributions each year. Jon is not required to take an RMD in 2020.
Some IRA beneficiaries are subject to a “five year rule” requiring the account to be distributed within five years of death of the IRA owner. For those beneficiaries subject to the “five year rule,” 2020 is disregarded – in other words, the beneficiary receives an additional year to completely distribute the account.
Q. What if I already took an RMD distribution in 2020?
A. Some IRA owners may have already taken an RMD in 2020. In that case, the RMD is now treated like a normal, non-RMD distribution. The significance of this is that the IRA owner can roll the distribution back into an IRA within 60 days of the distribution. A distribution that is properly rolled over is excluded from income.
On April 9, 2020, the IRS issued Notice 2020-23, which indirectly included an extension of the 60-day rollover rule for IRAs until July 15, 2020, but only for RMDs taken on or after February 1. If an RMD was taken in January of 2020, the extension does not apply, and the RMD cannot be returned to an IRA to avoid taxes due.
If an IRA owner chooses to roll the RMD back into an IRA, he or she would not be eligible to complete any other IRA to IRA rollovers for the next 12 months. This is known as the “one-per-year rollover” rule. Likewise, if an IRA owner performed any IRA to IRA (including Roth IRA) rollover within the 12 months preceding the receipt of the 2020 RMD, they would not be eligible to roll the RMD back into an IRA because doing so would break the one-per-year rollover rule.
The one-per-year rollover rule does not apply to direct trustee-to-trustee transfers from one IRA provider to another IRA provider, or to employer sponsored retirement plans, so if an RMD was taken from a 401(k) plan, the 60-day rollover extension can be used to roll it back into the plan or an IRA and vice versa (from an IRA to a 401(k) plan) to eliminate the tax bill.
Example 4. Let’s go back to Maria in Example 2 above. Suppose she took what she thought would be her first RMD on March 1, 2020 because she had no idea Congress was going to waive the 2020 RMD. Maria can decide to keep the money, or can recontribute the funds back into an IRA through July 15, 2020.
RMDs taken from beneficiary accounts may not be rolled over, with the exception of a surviving spouse beneficiary, who may rollover an RMD to the spouse’s own non-beneficiary retirement account.
Q. Are there exceptions to the one-per-year rollover rule?
A. The one-per-year rollover rule does not apply to direct trustee-to-trustee transfers from one IRA provider to another IRA provider, or to employer sponsored retirement plans.
The rule also does not apply to Roth IRA conversions; therefore, an unwanted IRA RMD that cannot be rolled over due to the once-per-year rule can be converted to a Roth IRA, since any pre-tax portion of the rollover would be taxable for 2020 anyway.
This material is being provided for informational purposes only and does not constitute tax, financial or legal advice. If you already took an RMD in 2020 and are contemplating putting it back into an IRA or other qualified retirement account or have additional questions, we encourage you to consult with your tax, financial or legal advisor.
Tax-Advantaged Distributions for Affected Individuals
Q. Will I be penalized if I need to take a distribution from my IRA because I have been impacted by the pandemic?
A. If you are an IRA owner affected by the COVID-19 pandemic (see below for eligibility), you may take a distribution from your IRA of up to $100,000 that will be entitled to special tax benefits. This is called a “coronavirus-related distribution,” or CRD, and must occur in 2020.
Q. What benefits am I entitled to if I take a coronavirus-related distribution?
A. A CRD entitles the IRA owner to three benefits:
- The income from the distribution can be spread equally over three years on the IRA owner’s federal income tax return.
- If the IRA owner is under age 59½, the 10% early distribution penalty is waived.
- The IRA owner can repay some or all of the CRD within three years, in which case it is treated like a rollover.
A CRD may also be taken from an inherited IRA and from a Roth IRA, provided that the total amount taken from all IRAs may not exceed $100,000 per affected individual.
Q. Who is eligible to take a coronavirus-related distribution?
A. To be eligible to receive a CRD, the IRA owner must meet one of three criteria:
- The IRA owner has been diagnosed as having the coronavirus by a test approved by the Centers for Disease Control and Prevention (CDC).
- The IRA owner’s spouse or dependent has been diagnosed with the coronavirus.
- The IRA owner experienced adverse financial consequences as a result of being quarantined, being furloughed or laid off or having work hours reduced due to the coronavirus, being unable to work due to lack of child care due to the coronavirus, or because of the closing or reduced hours of a business owned or operated by the IRA owner.
Millennium Trust may rely on an IRA owner’s representation that the owner meets the criteria to receive a CRD or receive the tax benefits listed above. Although the IRS has not yet issued any guidance, it is expected that the distribution will be reported similarly to any other IRA distribution.
Example 5. Gordon, who is 45 years old, has been diagnosed with COVID-19. He takes a distribution of $30,000 from his Millennium Trust IRA on April 30, 2020. Gordon will not owe the 10% early withdrawal penalty that would normally apply to him because he is under age 59½. In addition, unless he chooses not to, he can spread out the gross income over three years on his federal income tax returns. In other words, he will have gross income of $10,000 in 2020, 2021, and 2022 as a result of the distribution. Finally, he can repay the distribution, up to $30,000, into his IRA, as long as he does so by 2022.
Millennium Trust will continue to track the most recent guidance regarding these provisions, and will update this page as appropriate.
*Under the RMD rules, an IRA owner’s first RMD must be taken by April 1 of the year following the year in which the IRA owner reached the age requiring an RMD. In other words, if an IRA owner reached the age of 70½ in 2019, his or her first RMD (for the 2019 tax year) would have been due (absent the relief provided by the CARES Act) on April 1, 2020. The IRA owner’s second RMD (for the 2020 tax year) would have been due (absent relief provided by the CARES Act) on December 31, 2020. In this example, as a result of the relief provided by the CARES Act, the IRA owner must first take an RMD by December 31, 2021, which will be based on the account balance on December 31, 2020.
The coronavirus related relief mentioned in this post is newly enacted, and limited guidance exists and is subject to change. Individuals should consult their tax and financial advisors for detailed information about CARES Act coronavirus related issues.
This material is presented for general informational purposes only and does not constitute tax or legal advice. Millennium Trust Company performs the duties of a directed custodian, and as such does not sell investments or provide investment, legal or tax advice.