If you took money out of an IRA, 401(k) plan, or other retirement account in 2020 as a required minimum distribution (RMD), you have until August 31 to rollover or repay the distribution to avoid paying taxes on it.
RMDs Waived for 2020
The CARES Act waived all RMDs for 2020, including for seniors who turned age 70½ in 2019 and took their first RMD in 2020. (RMDs aren't required from Roth IRAs.) However, the CARES Act wasn't enacted until late March. As a result, some people took their RMD for 2020 before they knew they weren't going to be required for the year.
To help these people, the IRS is allowing them to return the money to their retirement account or other qualified plan. However, RMDs must be rolled over to another IRA, another qualified retirement plan (e.g., a 401(k) plan), or returned to the original plan by August 31, 2020.
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The IRS is also waiving the one-rollover-per-12-month-period limitation and the restriction on rollovers to inherited IRAs for these repayments.
Taxation of Money That Isn't Rolled Over
If you miss the August 31 deadline, the money you took out of a traditional IRA, 401(k) plan, or other retirement account will be taxable income for 2020. That's true even if you originally intended the withdrawal to be an RMD.
So, if you want to avoid paying taxes on the money you took out as a RMD earlier this year, you don't have much time left to return the money to the account or roll it over into a different retirement account.
Is a Roth Conversion Right for You?
If you don't need the money that you withdrew earlier in the year and you can afford to pay the tax on it, consider putting the money in a Roth IRA. For one thing, the money will continue to grow tax-free in the Roth account. Plus, when you do need the funds down the road, you can take a tax-free distribution from the account (because you would have already paid tax on it this year).
This is a particularly good idea if you're tax rate is expected to be higher in the future. If that's the case, pay the tax now at a lower rate rather than later at a higher rate. There are some hidden costs of Roth IRA conversions, so they aren't for everyone.
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