2020 has been a tumultuous year for the stock market, which can be worrisome for retirees who rely on their investment accounts to provide essential income. To help out seniors who may not want to take money out amid the market volatility, the Coronavirus Aid, Relief, and Economic Security (CARES) Act suspended required minimum distributions (RMDs) for 2020.
RMDs are mandated for those over 70 1/2, or over age 72 depending on when you turned 70 1/2. They're required for certain tax-advantaged accounts, including 401(k)s and traditional IRAs, and they can have major tax consequences since you have to pay ordinary income tax on withdrawn funds.
The suspension of the RMD requirements for this year provides seniors with much-needed flexibility, which likely comes as a relief to those who would prefer to leave their funds in their tax-advantaged accounts and not owe income tax for mandatory distributions taken this year.
But what about retirees who took out money before the CARES Act passed? The IRS has now made an important announcement that these seniors need to know about.
You have options if you took a RMD before the CARES Act passed
According to the IRS, seniors who took a required minimum distribution in 2020 before the CARES Act suspended these mandatory withdrawals now have the option to roll their money back into an eligible retirement account. Seniors who choose to take advantage of this option can complete their rollover by putting the money back any time until Aug. 31, 2020.
Those who took RMDs from an IRA also have the option to repay their distribution to that account any time before Aug. 31. For those who opt to do that, returning the money to the account will not be subject to rules that limit you to one rollover per year or to rules restricting when an inherited IRA can be rolled over.
In other words, if you took money out of your tax-advantaged retirement account before the CARES Act, you can put it back or roll it over into another retirement account that provides tax benefits. You can essentially undo the distribution, avoiding the taxes you'd normally owe on money withdrawn from your retirement funds.
Should you put your money back into a retirement account?
For some seniors, putting back their RMDs won't be an option if the money is already spent or if you need your withdrawn funds to cover your expenses.
But if you'd prefer to have your money in your retirement account and want to avoid taxes that go along with the distribution, you may decide to take advantage of the opportunity to return your funds or put them into another eligible account.
Being forced to take RMDs and pay taxes on withdrawals can be a big downside of 401(k)s and similar accounts, because you may prefer to leave your funds to grow if you don't need them. The CARES Act offers the unique opportunity to skip these distributions for a year, so anyone who took out money solely to fulfill RMD requirements but who doesn't actually need the money should seriously consider returning the cash.