Tax Implications
Omitting this year's withdrawal also means avoiding the taxes that would come with it. "If an individual will have other sources of income in 2020 that will put them into a higher tax bracket, suspending RMD is certainly appealing," says James Daniels, an accountant, attorney and managing director at UHY Advisors NY in Albany, N.Y. "If someone is in a low tax bracket in 2020 but is expecting more income in 2021, it may not be wise to defer the income."
Ken Moraif, a senior advisor at Retirement Planners of America in Plano, Texas, concurs. "Clients and advisors need to understand their current marginal tax bracket and what [it] may be in the future," he says. "If they feel they have the lowest income they can expect going forward, they may want to continue taking out their RMD. Remember, taking out your RMD does not mean you have to spend it."
If The RMD Was Already Taken …
If you already took your RMD, you have 60 days to roll the funds back in. That's good news for some, but not all. "If a person’s 60-day deadline occurred on or after April 1, they have until July 15" to reinvest it, says Carol McClarnon, a Washington, D.C.-based partner at Eversheds Sutherland, a global law practice. (An additional extension is pending.)
Ben Barzideh, a wealth advisor at Piershale Financial Group in Barrington, Ill., adds that anyone who is outside the 60-day rollover window can get an extension "if they can show they were negatively impacted by the Covid virus."
For those who took their RMD as cash from a stock fund, reinvesting the money might enable them to buy more shares than they originally had. "In essence, this means you're able to buy back into an investment that's actually become cheaper," says Larry Divers, executive vice president of Cannon Financial Institute in Athens, Ga.
On the other hand, those who took their RMD not as cash but as stocks or other securities may be stuck. McClarnon says, "The general rule is that rollovers have to be made using the same property as was distributed. So … that same stock would have to be returned."
If the security lost value since the distribution, though, there could be tax consequences. "It’s our understanding the client will have some taxable income for the portion of the decline in value that couldn’t get back into the IRA," says Barzideh.
But Daniels at UHY Advisors NY says you have the option of replacing the shares with equivalent cash, and you don't have to sell the security at the depressed value; you can hold onto it until the stock market rebounds.