IRS Lets Taxpayers Return January RMDs

Rarely when it comes to taxes can I use the word “anyone,” but this time it's true. By “anyone,” I mean if you took an RMD from your IRA or company plan, you can return it. This includes those who took RMDs in January and missed out under the prior limited relief. You don't have to worry about the 60-day time period that usually applies to rollovers. That is waived under this relief.

If you took your 2020 RMD and don't need it, you might consider depositing the unwanted RMD into a Roth IRA by Aug. 31. The RMD will be taxable, but the trade-off is future tax-free Roth IRA distributions.

If you are repaying your RMD, you also don't have to worry about that once-per-year rule I mentioned above. That, too, is waived for this relief. If you took monthly or other multiple RMDs in 2020, they can all be returned.

But wait, there's more!

If you are an IRA beneficiary or Roth IRA beneficiary subject to RMDs on the account you inherited, and you already took a 2020 RMD, you, too, can return it. Normally it is literally against the law for a nonspouse beneficiary to do a rollover, but the IRS broke the rules here just for this relief only. Beneficiaries also have until Aug. 31 to return any unwanted RMDs.

However, I wonder how many beneficiaries will actually do this? After all, when have you ever heard of a beneficiary returning anything? You cannot return what you've already spent. But for some beneficiaries in high tax brackets that don't need the funds, they can return the unwanted RMD and eliminate the tax bill.

But for all this relief, remember that the repayment deadline is Aug. 31. After this date all bets are off and all the regular rollover rules apply. So, act now.

One note on this relief:

While it's true that anyone with an unwanted RMD can return it, many retirees will see no benefit from this, since they need those RMD funds to pay bills and live on, so this will not help them. Many people take more than the RMD because they need the money. According to IRS numbers, that is 80 percent of those subject to RMDs. So this relief applies mainly to the other 20 percent who don't need the RMD funds and would rather avoid the tax on RMDs they don't have to take.

Some other retirees might benefit from not returning the RMD funds if they might be in a low tax bracket. That should be looked at before you rush to return your RMD. Not taking an RMD is nice, but the tax never goes away. You'll just pay it in the future, so it will grow and might cost more later, so look before you leap.

Not if you had the taxes withheld from your RMD. If you had the taxes withheld, you can make up the difference from your own other funds to complete the rollover and still eliminate the tax bill.

For example: Your RMD was $10,000 and you had $2,000 of tax withheld. You won't get credit for that $2,000 until you file your 2020 taxes next year.

If you want to return the full $10,000 RMD and you paid $2,000 in taxes, you now only have $8,000, so you can use $2,000 of your other funds — say, from a taxable savings account — to bring the full return to $10,000 and eliminate the tax bill.

Any part of the RMD not returned will be taxable, so in this example, you'd owe taxes on the $2,000 that you didn't return to your IRA. However, if you had tax withheld, it can be used to cover tax on other 2020 income, say from dividends, interest or capital gains — or to pay estimated taxes. The first installments of estimated taxes are not due until July 15, so you have time to lower those payments to make up for any tax you had withheld from your returned RMD.

Bottom line:

All 2020 RMDs taken can be returned (rolled back over) if done by Aug. 31.

Ed Slott, CPA, is one of the nation's top experts on retirement plans. For more than 30 years, he has educated both consumers and financial advisors on retirement tax-saving strategies. Most recently, he published Ed Slott's Retirement Decisions Guide: 2020 Edition and is the host of several popular public television specials, including his latest, Retire Safe & Secure! With Ed Slott. Visit www.IRAHelp.com to learn more.