My grandma – yia-yia – used to pay me cold hard cash to learn a tiny bit of Greek. Beyond remembering just one swear word, the lasting impact of her lessons is my self-identification as being “half-Greek.” As a result, I rarely pass up the chance to quote Greek philosophers.
According to Heraclitus of Ephesus, change is the only constant. Case in point, this year’s waiver of your IRA’s required minimum distributions or RMD.
First, a little bit of background. Once you reach age 72, the government forces you to take money out of your IRA every year. The reason is simple; after you’ve enjoyed decades of untaxed gains, the government wants you to pay up, finally.
On March 27, tucked inside the massive piece of legislation known as the CARES Act, Congress suspended RMDs for just this year. This distribution hiatus applies to regular IRAs, 401(k)s, and inherited IRAs, too.
While it is unusual for Congress to waive RMDs, one was also granted in 2009 during the Great Financial Crisis. Notably, during that saga, the waiver was granted very late in 2008. This allowed for plenty of time to plan for the year ahead. We weren’t as lucky this time!
This year’s rule change created some interesting technical challenges for retirees. What could be done if you had already taken your RMDs before March 27th? What if you didn’t really need the money you took out? How do you actually undo it?
There’s a little known rule, referred to as the 60-day rollover rule, that allows people who took money out of their IRA to simply redeposit it. You are only allowed to use this tool once every 12 months. Using that rule seemed like a simple solution to undo an RMD done before March 27. Unfortunately, it really wasn’t.
Apparently unbeknownst to Congress, this 60-day rollover tool isn’t actually allowed for RMD distributions. It only applies to regular, non-RMD distributions. To further complicate matters, since the CARES Act became law on March 27, even incorrectly using the 60-day rollover rule still didn’t help those Johnny-on-the-spot retirees who took their RMD before January 27.
This confusing state of limbo is how things stood for about three months since the CARES Act had passed; until about a week ago.
Finally, on June 23, the IRS published a notice that says any RMDs can be returned to your IRA by August 31. And, the new guidance covers any distributions taken all the way back to the start of 2020.
Actually, it turns out that Heraclitus’ wisdom was not completely true. Change really isn’t the only constant. He forgot about the certainty of both death and taxes.
With this new get-out-of-jail-free card – which expires by August 31 – you may want to consider returning any unwanted RMDs. Deferring taxes for another year is a deal that’s likely too good to pass up. I’ll keep you posted on my work finding a way to defy death. Hint: Don’t hold your breath for too long!
Jason P. Tank, CFA is both the owner of Front Street Wealth Management, a purely fee-only advisory firm and the founder of the Money Series, a non-profit program committed to providing open-access to financial education, for all. Contact him at (231) 947-3775, by email at Jason@FrontStreet.com and at www.FrontStreet.com