Let’s talk about the CARES Act RMD waiver

Steve Merrell |

The CARES Act passed by Congress last March suspended required minimum distributions for IRA, 401(k) and similar retirement accounts for the entire year. People who took an RMD this year must make an important decision by the end of the month—do I keep the RMD or do I roll it back into my retirement account? Several people have asked me about the RMD waiver. Here are the answers to some of the more common questions I’ve heard.

Q: I took an RMD before the CARES Act was passed. Can I roll the RMD back into my IRA?

A: Yes, as long as you do it before August 31. After August 31, the distribution will be considered final. August 31 is a Monday, so if you plan on doing this you should contact your financial advisor or your custodian no later than August 27 in order to give the transfer plenty of time. Remember, the money needs to actually be in your IRA by 8/31.

Q: When I took my RMD, I had them withhold taxes. Can I get those taxes back?

A: Unfortunately, no. However, those taxes can be applied to other tax liabilities when you file your taxes for 2020. If you make estimated tax payments, they can also be used to satisfy those requirements.

Keep in mind that any money you do not roll back into your IRA—even if it was withheld for taxes—will be considered a taxable distribution to you in 2020. For example, let’s suppose you took an RMD of $10,000 in January and had them withhold $2,000 for taxes. If you want to avoid taxes on the entire distribution, you will need to put $10,000 back into your IRA by August 31. That means you will need to come up with $2,000 from some other source. If you only return the $8,000 you actually received, you will still owe taxes on the $2,000 that was withheld for taxes.

Q: I spent the money from my RMD, but I would still like to put it back into my IRA. Can I roll money from a taxable investment account into my IRA? Would that make sense from a tax point of view?

A: Yes, the money you roll back into your IRA can come from anywhere. However, you cannot put more money into your IRA than would have been attributable to your RMD. For example, let’s suppose you took a $10,000 distribution from your IRA, but your RMD was only $7,500. The maximum you can put back is $7,500.

Whether it makes sense from a tax point of view depends on your individual situation. In most cases it would make sense, because IRA distributions are taxed as ordinary income—the highest marginal tax rate you are likely to face. In any case, it is best to fund your IRA, including the rollover of your 2020 RMD, using cash or proceeds from asset sales that generate very little in the way of capital gains.

Q: Can I fund the rollover of my RMD by contributing stocks from a taxable account to my IRA?

A: No. Contributions to IRAs—including the RMD rollover—can only be made with cash.

Q: Why is there an RMD waiver in the first place?

A:  According to the text of the bill, the CARES Act was intended “to provide emergency assistance and health care response for individuals, families, and businesses affected by the 2020 coronavirus pandemic.”  Many of its provisions did just that. For example, Payroll Protection Program loans and enhanced unemployment benefits put cash into the hands of businesses and consumers with the intent that they would continue to spend and help offset the slowing economy.

But the RMD waiver was different. Instead of encouraging spending, it actually encourages savings. Millions of people right now are trying to figure out how to get their money back into their IRAs where it will sit unspent for years to come. I don’t have a problem with that, but it certainly won’t stimulate the economy. Perhaps a better policy move would have been to keep RMDs but to have waived the taxes on those distributions. That would have certainly done more to spark marginal spending. 




Steven C. Merrell  MBA, CFP®, AIF® is a Partner at Monterey Private Wealth, Inc., a Wealth Management Firm in Monterey.   He welcomes questions you may have concerning investments, taxes, retirement, or estate planning.  Send your questions to: Steve Merrell, 2340 Garden Road Suite 202, Monterey, CA  93940 or email them to steve@montereypw.com.