Your Money, Your Future
Your Money, Your Future

You're running out of time to reverse this retirement withdrawal and save on taxes

Key Points
  • The CARES Act permits retirement savers to bypass their 2020 required minimum distribution from their 401(k) plans and individual retirement accounts.
  • Initially, only some people who took their RMDs were able to roll the withdrawals back into the account. The IRS will now give all savers until Aug. 31 to return the money.
  • If you don’t need the cash, returning the RMD can help you save on your 2020 taxes.
Lucy Lambriex

If you took a mandatory distribution from your retirement savings this year, you're running out of time to put the money back.

The CARES Act, the coronavirus relief act that took effect this spring, permitted retirement account holders to bypass required minimum distributions for 2020.

RMDs are the annual withdrawals you must take from your individual retirement account and 401(k) plans after you reach age 70½ — or 72, starting this year.

People who inherit IRAs are also subject to RMDs, and they're also allowed to skip the distribution for 2020.

If you already took the money, you have until Aug. 31 to put it back.

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Resist the urge to procrastinate.

"The people you'll need to contact — the institution, your advisor — they could be away," said Ed Slott, CPA and founder of Ed Slott & Co. in Rockville Centre, New York.

"Don't go any later than Aug. 20," he said. "If you're going to do it, just do it."

The earlier you return the RMD, the better, because there are many ways for the transaction to go wrong.

Forgetting to 'contribute' the taxes

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RMDs from traditional IRAs and 401(k) plans are subject to income taxes, so waiving the distribution or returning the funds could help you save on levies.

But you must make sure you give back the income taxes your custodian may have withheld, not just the net amount you received.

"Say you took a $10,000 RMD, but $2,000 in taxes were withheld," said Slott. "If you roll back only the $8,000, you'll be taxed on the remaining $2,000 you didn't roll over."

You'll have to dip into other funding to complete the transaction.

Returning monthly RMDs

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Some retirees opt for splitting their annual RMDs into 12 monthly disbursements. In this case, you might have taken multiple distributions over the course of the year already.

In this case, you'll have to contact your custodian and ask them to halt the payments for the remainder of the year.

You can replace the payments you have already received, too. Make sure you cover the taxes withheld and act quickly.

"You can put them all back, but only if you do it by Aug. 31," said Slott.

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Be aware that the RMD waiver is for 2020 only.  Next year, you'll be required to take your distribution as per usual.

"It's just the way the rules work: 2020 is disregarded," said Slott. "People think that if they put the money back this year, they'll have to take two distributions next year."

But what if this year you took more than your RMD? You can only return the amount that you would have been required to take, said Slott.

Characterize it as a return, not a contribution

Finally, since the tax rules changed so rapidly this spring, savers should make sure that their custodians are tagging the transaction correctly as a "return of funds."

"There were some financial institutions that weren't ready for this and thought the client was making a contribution," said Slott.

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Accidental excess contributions come with a price tag: They're taxed at 6% a year as long as the excess amount remains in the IRA.

"You have to tell them that this is a return and make sure it's recorded that way," Slott said.

"Look at the different ways things can go wrong," he said. "This is why you start the process ASAP."