How to Use a Coronavirus-Related Distribution to Reverse Your RMD (2020)

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On Friday, March 27, 2020, President Trump signed H.R.748 – Coronavirus Aid, Relief, and Economic Security (CARES) Act into law. The act contains in it many temporary provisions to try and help the economy during this 2020 coronavirus pandemic. The most interesting thing about the bill is that, by nature of the waivers, Congress is effectively acknowledging that many IRS requirements are known to be burdens on the people and the economy.

Among the temporary measures, Congress created the provision where retirement plan owners can make up to $100,000 in retirement distributions during 2020 and have 3 years from the date of each distribution to redistribute any or all of them as coronavirus-related distribution rollover contributions.

If you or your spouse have tested positive with COVID-19, then you are permitted to take advantage of this provision. For all others, the requirement is being a person “who experiences adverse financial consequences as a result of being quarantined, being furloughed or laid off or having work hours reduced due to such virus or disease, being unable to work due to lack of child care due to such virus or disease, closing or reducing hours of a business owned or operated by the individual due to such virus or disease, or other factors as determined by the Secretary of the Treasury (or the Secretary’s delegate).”

Alongside these measures, Congress also waived the 2020 RMD requirement, as we covered in the article “If You Act Fast, You Can Undo Your 2020 RMD Thanks to the CARES Act.”

Some seniors made distributions in early January and were already out of the 60-day rollover contribution window by the time Congress made minimum distributions no longer required. Others distribute monthly and had more than one distribution and are limited by the one rollover contribution distribution per year.

For those who want to redistribute and cannot make a regular rollover contribution, they may still be eligible for a coronavirus-related distribution rollover contribution.

Under the CARE Act, you can redistribute up to $100,000 in aggregate distributions from 2020 to any IRA or eligible retirement plan within a 3-year time period and have it count as though it were a direct trustee-to-trustee transfer that happened within the 60-day deadline. This is more useful than the 60-day rollover but requires that you have experienced adverse financial consequences because of the coronavirus.

If you’d like to read the requirements for yourself, the relevant section of the CARE Act says:

(2) AGGREGATE DOLLAR LIMITATION.—

(A) IN GENERAL.—For purposes of this subsection, the aggregate amount of distributions received by an individual which may be treated as coronavirus-related distributions for any taxable year shall not exceed $100,000.

….

(A) IN GENERAL.—Any individual who receives a coronavirus-related distribution may, at any time during the 3-year period beginning on the day after the date on which such distribution was received, make 1 or more contributions in an aggregate amount not to exceed the amount of such distribution to an eligible retirement plan of which such individual is a beneficiary and to which a rollover contribution of such distribution could be made under section 402(c), 403(a)(4), 403(b)(8), 408(d)(3), or 457(e)(16), of the Internal Revenue Code of 1986, as the case may be.

(B) TREATMENT OF REPAYMENTS OF DISTRIBUTIONS FROM ELIGIBLE RETIREMENT PLANS OTHER THAN IRAS.—For purposes of the Internal Revenue Code of 1986, if a contribution is made pursuant to subparagraph (A) with respect to a coronavirus-related distribution from an eligible retirement plan other than an individual retirement plan, then the taxpayer shall, to the extent of the amount of the contribution, be treated as having received the coronavirus-related distribution in an eligible rollover distribution (as defined in section 402(c)(4) of such Code) and as having transferred the amount to the eligible retirement plan in a direct trustee to trustee transfer within 60 days of the distribution.

(C) TREATMENT OF REPAYMENTS OF DISTRIBUTIONS FROM IRAS.—For purposes of the Internal Revenue Code of 1986, if a contribution is made pursuant to subparagraph (A) with respect to a coronavirus-related distribution from an individual retirement plan (as defined by section 7701(a)(37) of such Code), then, to the extent of the amount of the contribution, the coronavirus-related distribution shall be treated as a distribution described in section 408(d)(3) of such Code and as having been transferred to the eligible retirement plan in a direct trustee to trustee transfer within 60 days of the distribution.

(A) CORONAVIRUS-RELATED DISTRIBUTION.—Except as provided in paragraph (2), the term “coronavirus-related distribution” means any distribution from an eligible retirement plan made—

(i) on or after January 1, 2020, and before December 31, 2020,

(ii) to an individual—

(I) who is diagnosed with the virus SARS–CoV–2 or with coronavirus disease 2019 (COVID–19) by a test approved by the Centers for Disease Control and Prevention,

(II) whose spouse or dependent (as defined in section 152 of the Internal Revenue Code of 1986) is diagnosed with such virus or disease by such a test, or

(III) who experiences adverse financial consequences as a result of being quarantined, being furloughed or laid off or having work hours reduced due to such virus or disease, being unable to work due to lack of child care due to such virus or disease, closing or reducing hours of a business owned or operated by the individual due to such virus or disease, or other factors as determined by the Secretary of the Treasury (or the Secretary’s delegate).

When this says it applies to “an individual retirement plan (as defined by section 7701(a)(37) of such Code),” section 7701(a)(37) simply references section 408(a) and (b), which reads:

(a) Individual retirement account For purposes of this section, the term “individual retirement account” means a trust created or organized in the United States for the exclusive benefit of an individual or his beneficiaries, but only if the written governing instrument creating the trust meets the following requirements: …

This means that inherited IRAs are permitted to do coronavirus-related distributions and rollovers because they are both included in the definition of an IRA and permitted to do trustee-to-trustee transfers, which the code says the coronavirus-related rollover contribution “shall be treated … as having been transferred to the eligible retirement plan in a direct trustee to trustee transfer within 60 days of the distribution.”

In this way, those with inherited IRA distributions they would like to reverse or those with distributions no longer eligible for regular 60-day rollover contributions may be able to still complete either a Roth conversion or IRA redistribution with those assets.

Photo by Mazen Ir on Unsplash

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Megan Russell has worked with Marotta Wealth Management most of her life. She loves to find ways to make the complexities of financial planning accessible to everyone. Her most popular post: The Complete Guide to Your Washing Machine