IRA Contributions and RMD Withdrawals Under the CARES Act: Today's Slott Report Mailbag
By Andy Ives, CFP®, AIF®
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Dear Mr. Slott,
I seem to have gotten myself into a jam with my 2020 RMD withdrawal and the CARES Act, as it stands now. Hoping you are able to help, or make a suggestion on how to proceed.
In January, over three withdrawals, I took my entire 2020 RMD from an IRA. Then the CARES Act seemed to forgive/not require distributions during 2020. I returned the money to my IRA. Now the law has made a determination that RMD withdrawals beginning February 1, 2020 through May 15, 2020 and placed back into IRA accounts are forgiven. Well, my January RMD withdrawal was not forgiven, but I had already placed it back into the IRA account. Do I wait to see if there might be an adjustment including January distributions? Should I take the money out of the IRA account again? Is that allowed? Do I have until December, 2020 to do that in hopes the law will be altered? Is it realistic to expect the law to change? I have read your previous commentary on the subject. Lastly, how is the IRS going to look at all this? I cannot make contact with them, have written nine letters, made many calls to various offices.
Any help or assistance will be greatly appreciated.
You are in the same confusing RMD boat as many others. The big problem I see in your situation is a violation of the one-rollover-per-year rule. You said you took your RMD in January over three installments. Assuming no other rollovers were done in the previous 365 days, only one of those three payments was eligible to be rolled back to your IRA within 60 days. Even if you acted within the 60-day window, the other two are considered “excess contributions” and will need to be properly removed along with the “net income attributable” on both. The deadline for removal is October 15, 2021 to avoid any penalty. You may want to seek assistance from a knowledgeable financial advisor to help complete these transactions.
While the current waiver period of the 60-day rollover period is clunky, we anticipate further guidance from the IRS expanding the 60-day rollover window. However, until the rules are actually updated, we are stuck with current guidelines. Also, will the IRS relax the one-rollover-per-year rule for 2020, which would erase your current excess contribution problem? Time will tell, and we may not get full clarification until later this year.
I have a couple of clients that make over a million dollars a year. Could they make non-deductible contributions to a Traditional IRA and then convert to a Roth IRA?
What you are describing is the Backdoor Roth strategy. Yes, individuals who make more than the Roth IRA contribution limits ($196,000 - $206,000 for a married couple filing jointly in 2020) can make non-deductible contributions to a traditional IRA and then immediately convert those dollars to a Roth IRA. However, and this is an important item to be aware of, the pro-rata rule must be considered. All IRA, SIMPLE and SEP accounts are aggregated for the pro-rata calculation to determine how much of the conversion is taxable. You cannot just carve out after-tax dollars and convert only those to a Roth while leaving the pre-tax dollars behind.
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