The subject of a reader’s question has to do with 2020 RMDs that should not be taxable because they were reversed.

D.R. normally takes her required minimum distributions (RMDs) from her individual retirement accounts in December of each year, but in 2020, she decided to take them early.

“In January ... I withdrew the 2020 RMDs from my IRAs because I was worried that the 2019 rise in the markets was not sustainable. (I thought the markets might crash, and withdrawing the RMDs early in the year would require selling a smaller percentage of my IRA portfolio.)”

D.R. does not rely on her RMDs to cover living expenses, so when she heard in March that RMDs were suspended for 2020 through the Coronavirus Aid, Relief and Economic Security (CARES) Act, she was happy to put that money back into her IRAs, something she accomplished in July 2020, ahead of an Aug. 31 deadline established by IRS Notice 2020-51.

All was good until just recently, when she received her tax-reporting documents from her IRA custodian.

She writes: “I have now received 1099-Rs for the IRAs that indicate the RMDs taken in January 2020 are fully taxable. I have not found any IRS guidance on how to report the return of the RMDs on my IRS Form 1040 or how to avoid paying tax on them.

“Do you have any advice on how to report the return of the 2020 RMDs? Many thanks in advance.”

It is not unusual for Form 1099-R to reflect amounts distributed as taxable that have been timely rolled over to a qualifying account, according to CPA Michael D’Addio of Marcum LLP’s New Haven, Connecticut, office. Marcum is a national accounting and advisory firm.

“So long as the amount was properly rolled over by the appropriate 60-day deadline (or by Aug. 31 for an early 2020 distribution), it is not taxable regardless of what is reported on Form 1099-R,” explained D’Addio.

Here are some general rules on how to handle a tax return in this situation, but be cautious. Since tax returns are specific to individual taxpayers, you’ll need to rely on the advice of your own accountant.

The total distribution is entered on IRS Form 1040’s line 4a for IRA distributions (line 5a for qualified plan distributions). The taxable amount is entered on line 4b (5b for 401(k)s). (That would be zero if the entire distribution was rolled over on a timely basis.) Then write the word “Rollover” in the space to the left of line 4b (or 5b for a 401(k)).

A spokesperson for Fidelity Investments, an IRA custodian to millions, confirmed that their clients will receive a 1099-R form for RMD amounts taken in 2020. If they rolled all or part of their RMD back into their retirement account in 2020, they will also receive IRS Form 5498, which displays the amount as a rollover contribution.

Note that you may not receive Form 5498 until May 31, 2021. Be sure to keep it in your tax records.

What if the 2020 distribution was not timely rolled over? It is subject to being taxed. However, it is possible the rollover could fall under coronavirus-related distribution rules -- a subject for a later column if there is interest (let me know).

Before I sign off, I have to share D.R.’s note to me:

“Dear Ms. Jason, I very much enjoy your column, which I read in The Union Leader of Manchester, N.H. Thank you for your commonsense approach to financial topics.”

Love those reader letters!

With more than 1,000 weekly columns under my belt, the column is still a joy to write, in large part due to your correspondence. If you have thoughts to share or questions to ask, please write to me at readers@juliejason.com.

Julie Jason, JD, LLM, a personal money manager (Jackson, Grant Investment Advisers Inc. of Stamford, Connecticut) and award-winning author, welcomes your questions/comments (readers@juliejason.com). Please visit www.juliejason.com.

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A number of readers of this column have questions about required minimum distributions (RMDs). As a reminder, RMDs are withdrawals from tax-deferred retirement accounts such as traditional IRAs. They are mandated by the Internal Revenue Code when the owner of the IRA reaches age 72. Roth IRAs do not have RMD requirements for the owner. (Someone who inherits a tax-deferred or Roth IRA no matter what age is subject to RMDs.)

Since the questions have to do with transferring money to Roth IRAs, I’d like to review some Roth basics first.

Not everyone is eligible to contribute to a Roth IRA. If you have zero earned income, no luck. On the other hand, you can’t earn too much, either. For example, single filers whose MAGI (modified adjusted gross income) is $140,000 or more are locked out, as are married couples filing jointly with MAGI of $208,000 or more in 2021. You can look up 2021 annual contribution limits online at tinyurl.com/y44gem8w.

With this in mind, let’s answer a few questions, but be sure to check with your tax adviser before taking any action.

M.M. wants to know: “If a retiree has no earned income from a job, can that retiree withdraw funds from a traditional IRA and deposit them into an already established Roth IRA? Or into a new Roth IRA?”

ANSWER: Yes, you can, but you cannot use your RMD withdrawal to do that. The mechanism for moving money from a traditional IRA to a Roth is called a Roth “conversion.” When you withdraw money from the traditional IRA, that amount will be subject to taxes (above your IRA basis). Say your RMD is $10,000; if you withdraw only $10,000, there is nothing left to convert to a Roth. If you withdraw $15,000, you can convert $5,000. You’ll be taxed on $15,000.

The nice thing about a conversion is that there are no income caps. Anyone of any age and any income level can do a

conversion.

B.S. shared: “Our financial situation is very modest. ... What should I do with my RMD in 2021? We don’t need the money to live on as my wife is still working full time. ... I want to save as much as I can now for when my wife retires in hopefully two years. ... Can I put this money into a Roth IRA?”

Answer: No. As mentioned previously, you cannot use your RMD to convert to a Roth. But, you can use withdrawals above and beyond the RMD to convert. Again, those withdrawals will be taxable as income.

M.R. is under age 72 and feels that “[d]oing partial Roth conversions can be an effective way to reduce RMDs in the future, or eliminate them if possible, but many things need to be considered first, such as tax brackets now and once RMDs begin, where the money is coming from to pay the taxes on the Roth conversion, whether a person needs the Roth money to live on in retirement, their view on what future tax rates might look like, and using the Roth as a possible legacy.”

I agree.

M.R. wants to know if he should continue converting after he is 72 and taking RMDs. That, of course, depends on M.R.’s financial situation and goals. Again, M.R. would need to take the RMDs first. He would then take additional withdrawals to convert, after paying the taxes on both the RMD and the amount converted. Whether that’s a good idea will depend on goals and circumstances.

One thing for sure is this: I would rather have a tax-free Roth over a tax-deferred IRA any day. How to get there may or may not be worth the price -- that will depend on your age, tax situation, legacy interests, cash flow, the size of your traditional IRA, and everything else that goes into planning for the future. It’s all about paying taxes today to be free of taxes in the future.

For further reading, refer to “Traditional and Roth IRAs,” an IRS publication, at tinyurl.com/y5un8ugh.

Julie Jason, JD, LLM, a personal money manager (Jackson, Grant Investment Advisers Inc. of Stamford, Connecticut) and award-winning author, welcomes your questions/comments (readers@juliejason.com). Please visit www.juliejason.com.

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Now that it’s 2021, required minimum distributions (RMDs) are back.

RMDs were suspended for the year 2020 by the Coronavirus Aid, Relief, and Economic Security (CARES) Act, but no longer.

If you were taking RMDs before 2020, you’ll have to resume your RMDs now. As a reminder, RMDs apply to traditional IRAs (individual retirement accounts) and other tax-deferred accounts. Roth IRAs are not subject to RMD requirements during the Roth IRA owner’s lifetime. As another reminder, I caution you to speak with your accountant or tax adviser before taking RMDs.

Let’s go through a few simple examples, assuming you have a single IRA that was worth $1 million on 12/31/2020. That’s the measuring date for 2021 RMDs.

The official guide to RMDs is IRS Pub. 590-B, “Distributions from Individual Retirement Arrangements (IRAs)” (tinyurl.com/yyvsbdtj). While the new 2020 version of Pub. 590-B is not out yet, the divisors have not changed from 2019.

Assume you are 84 years old. You’ll find your RMD divisor (“Distribution Period”) of 15.5 in “Table III (Uniform Lifetime)” of Pub. 590-B (Appendix B). Based on that divisor, your 2021 RMD will be $64,516.13, or 6.45% of $1 million. That’s the amount that must be withdrawn before 12/31/2021.

Another divisor applies if your spouse is your sole beneficiary and he or she is more than 10 years younger. See Table II of Appendix B.

As pointed out by W.F., a reader of this column, those born in 1949 need some special help understanding RMD rules as a result of the SECURE (Setting Every Community Up for Retirement Enhancement) Act. Those who were born in the first half of the year (Jan. 1 through June 30, 1949) turned 70 1/2 in 2019, before the adoption of the SECURE Act. They became subject to RMD rules in 2019.

Those born in the second half of 1949 (July 1 through Dec. 31, 1949) are governed by the SECURE Act’s age 72 rule. For instance, W.F.’s birthday is in September of 1949. He is turning 72 this year, so he will need to take a 2021 RMD. The Table III divisor for age 72 is 25.6, 3.9% of the 12/31/2020 balance.

Keep in mind that if you are taking your very first RMD in 2021 because you are 72 (having been born in the last half of 1949), a special rule applies to you. In that case (your very first RMD), you can choose to take two RMDs in 2022 instead of one in 2021 and another in 2022. That is, you can take your first RMD based on 12/31/2020 values by 12/31/2021 or, if you choose, you can delay that very first RMD to the first quarter of 2022 (by 4/1/2022). But that means you will be taking two RMDs in 2022: your 2021 RMD based on your 12/31/2020 values and your 2022 RMD based on your 12/31/2021 values. Be sure to talk with your accountant before deciding on a course of action for your first RMD.

If you were born anytime in 1950, you can take a breather. RMDs don’t apply to you -- yet. You will turn 72 in 2022.

Before signing off, let me share a resource with you -- a list of 2021 limits for traditional IRAs, Roth IRA and employer retirement accounts (tinyurl.com/y6tb7aw5). The resource, made available by Brentmark, also reproduces the Uniform Lifetime Table that we discussed in this column. Brentmark is a provider of calculation software for financial, estate, retirement and charitable planning.

Check out IRS resources as well, including those relating to RMDs (tinyurl.com/zn7ckor and tinyurl.com/gr7dhap) and IRAs (tinyurl.com/ycju3hmw).

Julie Jason, JD, LLM, a personal money manager (Jackson, Grant Investment Advisers Inc. of Stamford, Connecticut) and award-winning author, welcomes your questions/comments (readers@juliejason.com). Please visit www.juliejason.com.

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