Retirement Distributions and the CARES Act

Tax rules prevent you from stashing away your pre-tax retirement money indefinitely to avoid paying taxes. Some of the rules about pre-tax retirement accounts have changed multiple times, making it a real challenge to keep up. Age and distribution rule changes for annual Required Minimum Distributions (RMDs) from traditional Individual Retirement Account (IRA) and other pre-tax retirement plan distributions are particularly head-spinning.

An RMD is just what it sounds like – a required distribution that is calculated and paid annually based on the taxpayer’s age and pre-tax retirement plan balances. The RMD amount is included in taxable income. The good news – there are online tables to help to calculate the RMD amount that must be taken every year. The bad news – a 50% penalty is assessed by the IRS if the minimum RMD is not taken by the deadline (e.g., April 1, 2020, for tax year 2019). Quite a strong incentive to follow the RMD rules.

Back in December 2019, the Setting Every Community Up for Retirement Enhancement Act (aka “SECURE Act”) was signed into law. The SECURE Act changed several important aspects of distributions from traditional (pre-tax) IRAs, 401(k) plans, 403(b) plans, and other pre-tax retirement plans. For example, the age when RMDs must start increased from 70½ to 72. See my December 11, 2019, blog post http://www.searlebzllc.com/2019/12/ for details about SECURE Act changes.

Well, because of COVID-19, portions of the December 2019, the law related to RMDs didn’t stand for long. On June 23, 2020, the IRS announced that, per the Coronavirus Aid, Relief, and Economic Security Act, known as the CARES Act, the RMD is waived for 2020. Taxpayers over 72 who had already taken her or his RMD for 2020 from a pre-tax retirement account has until August 31, 2020, to roll the funds back into the account. Ordinarily, RMD rollbacks need to be done within 60 days of the distribution.

The IRS is also giving taxpayers a couple of other breaks by not counting the RMD repayment toward the rule that prohibits more than one rollover per 12-month period and the restriction on rollovers for inherited IRAs. Nice breaks but more to track. 

Some of the rules about pre-tax retirement accounts have changed multiple times, like RMDs from pre-tax retirement plans that changed twice in less than a year! Keeping up can be hard. Sure, you can hire a tax professional to help you out, but you don’t have to. The best place for all the latest tax information is free and always available – www.irs.gov!

Federal (and Some State) Taxes Due July 15

Remember way back on March 21st when the IRS has delayed the 2019 tax deadline to July 15th? Around that time, many states also delayed their 2019 filing deadlines to align with the feds. Well, March 21st might seem like just yesterday, but time flies and the filing and payment deadline is now looming. At this writing, the Treasury Secretary is floating another filing deadline delay. Tax industry experts are opposed, concerned that another delay would make this confusing and exhausting tax filing season even worse.

So, what if you still aren’t ready to file your federal tax return by July 15th? No problem! You can apply for a tax filing extension from the IRS (and your state, too). No need to provide a reason but it does take a little time and effort to get it done correctly, to avoid potential underpayment interest and penalties.

Two important tips about getting a tax filing extension:

  • You Have to Apply

Individual taxpayers use IRS Form 4868 to request an extension to file their federal income tax return until October 15th. A federal extension can be filed directly on the IRS website, e-filed using approved tax software, or in paper form by midnight on July 15th. If you are getting a refund or submit the amount due with your extension (see #2 for more details), the extension request is automatically approved. If you are expecting a refund, you must wait until after your return is filed to get your money back. State extension requirements vary. Check your state tax department website for details.

  • You Must Pay What You Owe

Use the IRS Form 4868 instructions to estimate your income tax liability based on the information you have https://www.irs.gov/pub/irs-pdf/f4868.pdf. Compare your estimated tax liability with your tax withholding or quarterly estimated payments and enter the numbers on the extension request form. If you are estimated to owe more federal income tax than you’ve paid in, the balance due must be paid with your extension request. Failure to pay will result in an underpayment penalty and interest on the unpaid amount, accrued daily until it’s paid. That really adds up.

Rushing at the last minute is stressful and causes mistakes. Better to give yourself more time to file your 2019 income tax returns by requesting an extension until October 15th. Need more details about estimating your 2019 tax liability and getting a tax filing extension? Go to the IRS website at https://www.irs.gov/forms-pubs/extension-of-time-to-file-your-tax-return