The Once-Per-Year Rule Still Applies
Slott also cautioned advisors to be aware of the once-per-year IRA rollover rule that states only one distribution can be put back per year. So under current law clients who take their RMDs as monthly income from their retirement accounts would only be able to return and remove the income taxes from one of their monthly distributions. Slott also cautioned that the once-per-year IRA rule refers not to calendar years, but a requirement that at least 365 days pass between each returned distribution.
“If your client has done any IRA to IRA or Roth IRA to Roth IRA rollover, the 60-day relief won’t help them, and you have to watch out for that,” said Slott. “That’s a problem that can only be fixed by Congress, and thus far any further stimulus or relief is dead-on-arrival in the Senate. It’s on Congress’s radar, they know the once-per-year rule is a problem.”
Slott also reminded listeners that non-spouse beneficiaries cannot take a rollover, and that qualified company retirement plans are exempt from the once-per-year rule. Likewise, rollovers from a retirement plan into an IRA that are then returned to the retirement plan are not subject to the once-per-year rule, nor are Roth conversions.
In 2021, advisors should plan for their clients to take RMDs as if 2020 “had never happened,” said Slott. However, clients and beneficiaries may still want to consider taking their RMD for 2020 while taxes are at generational lows.
“The CARES Act is a $2 trillion check on a bank account with no money in it,” he said. “At some point, rates are going to have to come up and the foundation of good tax planning is to always pay taxes at the lowest possible rates. It’s all about the tax-rate arbitrage, so start thinking about clients, prospects and beneficiaries who may be able to sneak money out now when taxes are low.”
The rules for qualified charitable distributions (QCDs) from IRAs remain largely unchanged, said Slott, except for a quirk that came out of 2019’s SECURE Act retirement legislation which raised the age for RMDs to age 72, but kept the age for taking a QCD at 70.5. That offers retirees a gap where they can take qualified charitable distributions out of their traditional IRAs and lower the amount they will be required to take out as distributions in the future.
Covid-19 Distributions And Loans
Advisors have to be very careful working with clients who want to take coronavirus-related distributions (CRDs) as allowed by the CARES Act, because the rules to qualify are very specific. Only two groups of people qualify to take a CRD from a qualified company plan or IRA—people who are sick or who have a family member fall ill with Covid-19, and those who are experiencing financial hardships.
“It’s not because you lost money in the market; you don’t qualify unless you’re sick or you lost your income, with other factors potentially to be determined by the Treasury. So far, those are the factors,” said Slott.
While anyone at any age can take a CRD as long as they qualify, not all company retirement plans are permitting participants to take CRDs, said Slott. Advisors may be able to help participants work around the issue by helping them take the money out for a hardship withdrawal, but treating it for tax purposes like a CRD. For the time being, the IRS will allow participants to treat hardship withdrawals as if they were CRDs.
If clients are qualified individuals, they can take up to $100,000 as a CRD in 2020, and spread the income over three years for tax purposes, but doing so should be a “last resort,” said Slott.