Looking to reverse that withdrawal from your retirement account? Here’s how to fix it and save on taxes

Personal finance

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The Aug. 31 deadline for reversing mandatory withdrawals from retirement accounts has passed, but a lucky few may still be able to return the money and save on taxes this year.

Earlier this year, President Donald Trump signed the CARES Act into law.

The law contained a provision that would allow retirement savers to skip their required minimum distribution from their individual retirement accounts and their 401(k) plans for 2020.

RMDs are the annual withdrawals you’re required to take from your IRA and each of your 401(k) plans after you turn 70½ — or, as of this year, 72.

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The relief also applied to people with inherited IRAs.

Savers who had already taken the distribution could put the money back into their account by Aug. 31.

Avoiding the RMD or putting the money back came with a bonus: Those distributions are normally subject to income tax, so if you skipped the withdrawal or replaced the money — plus any taxes withheld — it will help reduce the hit when you file your tax return next year.

Of course, some people are bound to miss the deadline, given the hectic pace of the year.

If you missed the deadline, the game isn’t necessarily over, but you’ll want to act quickly and bring along a tax professional for guidance.

“The vacation is over and you can’t go back,” said Ed Slott, CPA and founder of Slott & Co. in Rockville Centre, New York. “Those people who were angry after taking an RMD in January? The IRS gave them until Aug. 31.

“You took an RMD and want to put it back?” he said. “Now the regular rules apply.”

Here are three strategies that might help you if you’ve blown the deadline and you want to soften the tax hit.

1. A 60-day rollover

If you took your RMD late this summer, you just might be able to return the funds.

In this case, you’d have to do what’s known as a 60-day rollover to reverse the withdrawal.

That is, you redeposit the money into the IRA within 60 days of taking the distribution. You also must not have made any rollovers from one IRA to another in the last 12 months.

Replace any taxes that were withheld from the withdrawal.

The solution is a narrow one, and here’s why. First, if you took that withdrawal earlier this year, you can’t use this method to replace the funding. You’re simply out of the 60-day window.

Second, 60-day rollovers aren’t allowed for inherited IRA beneficiaries.

Though the IRS made a special exception earlier this year for these beneficiaries — they were able to roll distributions back into the account — that relief ended on Aug. 31.

2. Recharacterize as a coronavirus-related distribution

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Savers who want to put the money back into their retirement plan might also consider whether the distribution can qualify as a “coronavirus related distribution” under the CARES Act.

The legislation allowed savers to take up to $100,000 from their 401(k) or IRA without the 10% penalty that would normally apply if they’re under age 59½. You can pay the taxes on the distribution over the course of three years — or you can include the entire distribution in your income this year.

You may repay this distribution within three years. In that case, the IRS will treat it as if it were repaid in a trustee-to-trustee transfer and you won’t owe taxes on the distribution.

“It doesn’t matter when the withdrawal occurred this year; you would have up to three years to repay it,” said Jeffrey Levine, CPA and director of advanced planning at Buckingham Wealth Partners in Long Island, New York.

The vacation is over and you can’t go back.

Ed Slott

CPA and founder of Slott & Co.

Here’s the catch: You have to meet a set of standards in order for your withdrawal to be deemed a coronavirus-related distribution.

You’ll need to be a qualified individual under the CARES Act, which means you or your spouse were diagnosed with the disease.

Those who experienced adverse financial consequences because they were quarantined, furloughed, or laid-off may also qualify. The same goes for people who had to shut down a business they own due to Covid-19 or who had no access to childcare due to the pandemic.

If you check those boxes and you still have the RMD proceeds, you may be able to redeposit the funding as a repayment of a coronavirus-related distribution.

You will have to show the withdrawal as a coronavirus-related distribution on your tax return, which means you’ll need to file a new document known as Form 8915-E, said Slott.

3. Mitigate the taxes

Maybe it’s too late for you to put the money back and you’re unable to have your withdrawal qualify as a “coronavirus related distribution.”

In that case, it might be time to think about finding other ways to scrimp on taxes.

For instance, if you itemize on your income tax return, consider working with your tax professional to make contributions to your favorite charities.

You can still claim an itemized deduction for these gifts, and you can maximize your tax savings by donating appreciated stocks.

“The charitable deduction is the most flexible deduction we have,” said Jamie Hopkins, director of retirement research at Carson Group. “it’s something to consider if you’re concerned about the tax implications.”

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