Withdrawals, RMDs, & Rollover

Farmer on iPad
06 Aug 2020

Has the coronavirus taken its toll on you, your family, or your finances? If so, there are a few options that can help when it comes from your retirement account. Financial trouble can arise from many different scenarios - like getting hit with a huge medical bill you were not expecting or totaling out your vehicle in an accident. Whatever may have happened, your retirement plan could provide you with some extra funds to help you through this tough year. Just keep in mind, while there is no penalty for an early withdrawal it is still taxable income.

One downside to drawing out of your retirement is that it is not “free money.” You will still need to pay income tax on the money withdrawn. There are, however, two silver linings to this situation. The first allows you to spread the taxable income over three different years instead of paying tax all at once. For example, if you take out $30,000, you can count $10,000 as income over the current year and the two years following. This lowers your tax for 2020 instead of claiming all $30,000 of income in one year. The second silver lining is that you can pay the money back and not be taxed on it. For example, when year 2022 rolls around and you pay back that $30,000 you withdrew in 2020, you can file an amended return for 2020 and 2021 to receive a refund of the tax you paid on the $10,000 of retirement income you claimed each year. Filing an amended return is not the most enjoyable process, but if you can get money back it is well worth doing. 

There are many changes that came in the Coronavirus Aid, Relief, and Economic Security Act (CARES Act). One sure retirement account-related change deals with required minimum distributions (RMD) for 2020. For the year 2020 and this year only, the government and Internal Revenue Service are waiving the required minimum distributions (RMD). It can lower your taxable income, thus resulting in paying less tax and keeping more money in your retirement account. But for the CARS Act, the law requires individuals to take a distribution from their retirement plan once they turn 72 (70 ½ for individuals who attained 70 ½ before 2020) years old. For some this could be a large amount. The CARES Act included the special provision allowing required individuals to take a pass on the distribution. 

What if you have taken your RMD for the year? The IRS will allow repayment. Required minimum distributions already received can be returned to the account it was withdrawn from, making it non-taxable income for you in 2020. Typically, individuals only have 60 days to return distributions to an account for it to be considered a rollover (thus non-taxable), but the CARES Act has extended the 60-day rollover rule to August 31st, 2020. So, if you took a distribution, you have until the end of August to roll the money into a retirement account to avoid having it count as income for 2020. Alternatively, if you planned on taking your RMD for 2020, that is a viable choice for your financial plans.

There are many different types of retirement plans available. As always, check with your financial advisor and tax professional to ensure your plan qualifies for the above treatment.

With both items, the CARES Act was enacted to help the taxpayer lower their income for 2020. There is a chance that a customer may need to draw funds from their retirement account because their farm is going to have a big loss this year, or they may need cash to pay for equipment or inputs. There are many possibilities why someone would draw from their retirement account. Luckily, there are options to spread the tax liability on the withdrawn amount over three years.