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August 31st Deadline Is Almost Here To Avoid Distribution Tax Hit!

Did you receive a required minimum distribution from a retirement account in 2020? If so, you may be able to return it to another retirement account by August 31 without taking a tax hit. Here is what you need to know:

Background on distributions and roll overs

You generally must begin taking distributions from IRAs and qualified retirement plans after reaching age 72 (recently increased from age 70½, beginning in 2020). The distribution amount is based on life expectancy tables and your account balance on December 31 of the prior year. Payouts are subject to tax at ordinary income rates.

To avoid paying taxes on a retirement account distribution, you generally must roll over the distribution (return the funds) to another qualified retirement account within 60 days. Another significant rollover rule is you can only do one IRA-to-IRA rollover in any 12-month period, regardless of the number of retirement accounts you own. (Rollovers from traditional IRAs to Roth IRAs are not limited.)

Distribution and rollover flexibility in 2020

A new law passed in March waived 2020 required minimum distributions from retirement accounts. The IRS also extended the normal 60-day window within which to make a rollover to August 31.

The Problem

You may have received a distribution from a retirement account prior to the IRS's announcement of being able to forgo a distribution this year. So are you allowed to change your mind and put your 2020 distribution back into a retirement account without taking a tax hit? The answer is yes! But you must act soon.

WHAT YOU NEED TO DO

  • Roll over to an IRA ASAP! You can avoid paying taxes on your 2020 IRA distribution by rolling it back into its original account or another IRA by August 31. Most 2020 distributions received from a retirement plan are eligible to be rolled back to the original retirement account, including the following:
    • Distributions received after December 31, 2019
    • Distributions received by beneficiaries from an inherited IRA
    • Distributions that would normally violate the once-per-12-month rollover rule when rolled to the new account
  • Report your withdrawal as a Coronavirus Related Distribution (CRA). If you want to keep your 2020 distribution, another option is to report your IRA distribution as a CRA. You can repay the distribution back into your retirement account over a period of three years. If you pay income tax on your distribution and then later re-contribute the funds to a retirement plan, you will be able to file an amended tax return to recover the taxes paid.
  • Roll over to a Roth, 401(k) or 403(b). Another option is to roll over the distribution to a Roth IRA, 401(k) or 403(b) account if any of those options are available to you.

This exercise can get complicated. If in doubt, please call for assistance.