Ordinarily, a formula is used to calculate your required minimum distribution (RMD) from your retirement account; inputs include your date of birth, your spouse’s date of birth, and the value of the account as of December 31 of the prior year. The RMD formula is designed so that your IRA never runs out of money—although distributions later in your life will be very small.
However, two significant rules have changed the RMD landscape for 2020.
Waiver of RMDs in 2020
This year, owners of IRAs are not required to take RMDs, regardless of their age. This applies to all IRAs (including inherited IRAs), 401(k)s, 403(b)s, and 457 plans from government employers.
If you took an RMD from your IRA earlier this year, you can put the money back without penalty. It will be treated as a tax-free rollover, provided you return the funds by Aug. 31, 2020. (Normally, you have only 60 days to do a tax-free rollover.) The guidance has changed a few times this year but now applies to all 2020 distributions, including those taken in January, prior to when the COVID-19 pandemic reached our shores.
Many retired folks pay their withholding tax through their RMD. If you return the funds, you can recover the taxes withheld from your RMD next year, when you file your 2020 return. To avoid tax on your RMD, you must return the gross distribution.
Here is an example from The Kiplinger Tax Letter: Say you took out a $20,000 RMD from your IRA in January and opted to have 20% in federal income taxes withheld from the distribution, resulting in a $16,000 net payment. If you want the entire amount of the RMD to be treated as a tax-free rollover, you must repay $20,000 to your IRA by August 31. You would claim the $4,000 withheld as taxes paid when you file your 2020 1040.
RMDs Now Begin at Age 72
The SECURE Act passed by Congress in December 2019 changed the age at which RMDs must start, from 70 ½ to 72, beginning in 2020. However, see above for the waiver of any required distribution in 2020.
Beginning in 2021, if you are under the age of 72 on December 31 of any year, you have no RMD compliance requirement, and the assets in your IRA and other tax-deferred account can continue to grow tax-free.