Inherited an IRA and made a forced withdrawal? You can put it back
If you made a mandatory distribution from an inherited retirement account this year, the IRS will leave you the money back.
The CARES law, which went into effect on March 27, allowed individuals to skip required minimum distributions for 2020.
This is the annual payout that you will need to deduct from your Individual Retirement Account and 401 (k) plans after you turn 70½ – or 72 this year or later.
Beneficiaries of Inherited IRAs were also allowed to bypass this year’s RMDs, but were unlucky if they had already made the withdrawal – until last week.
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The IRS has now relaxed the rules for them who took their RMDs in 2020 and gave them until August 31st to return the money to the account.
This discharge also applies to beneficiaries of inherited IRAs, a surprising step that would otherwise be prohibited by law.
“Shock is more of an indication of the real feeling here,” said Jeffrey Levine, CPA and director of advanced planning at Buckingham Wealth Partners in Long Island, New York.
“I haven’t spoken to anyone who thought the IRS could do this if they wanted to,” he said. “You blatantly contradict applicable law.”
Prior to the IRS’s RMD relief last week, retirement savers who had already availed the payout earlier this spring would have had to do a so-called 60-day rollover to reverse the payout.
To qualify, you would need to deposit the payout with the IRA within 60 days of receiving the distribution. You must also not have made any transfers from one IRA to another in the past 12 months.
You would also have to replace any taxes that were withheld from the payout.
The catch is that 60-day rollovers are not allowed for inherited IRA beneficiaries, but now there is a special exception only for 2020.
The way the IRS introduced the change was also unusual.
Ordinarily, Congress writes laws, and once they come into effect, the regulatory authorities conduct their interpretation and execution.
The RMD relief introduced by the IRS on inherited IRAs skipped that process, Levine said.
“It’s one of those things that the Treasury Department and the IRS should work with Congress on and say, ‘The next law you pass this year, we’ll make sure you put an amendment in,'” he said. “So it’s done legally and correctly.”
When you get relief, take it. Just don’t expect a similar measure in the next year.
“The scope is limited and only for this year for distributions that would have been RMDs without the CARES Act,” Levine said.
Beneficiaries of Retirement accounts are usually required to make annual withdrawals each year based on their own life expectancy.
The SECURE Act changed this law so that individuals who inherit in 2020 and beyond must liquidate the account within 10 years.
If you’re lucky enough not to need the money, reversing the RMD for 2020 could cut your tax bill. These withdrawals are usually subject to income tax.
“The biggest question would be, ‘Do you want to reduce your tax bill? Or do you need the money?'” Levine said.
“However, if you take it out this year when your income is lower – maybe you’ve lost a job – it might not be the worst in the world,” he said.
While the federal government is OK with replacing the RMD from your inherited IRA, speak to your tax advisor to see if your state will also follow Uncle Sam’s instructions.
“You reset the RMD and it doesn’t count on your federal return, but what if your state counts it?” asked Dan Herron, CPA and director of Elemental Wealth Advisors in San Luis Obispo, California.
“Those are the differences you will have.”