By: Cheryl Costa, MBA, CFP®
The CARES Act waived Required Minimum Distributions (RMDs) for 2020. That was a big win for many retirees but the waiver announcement was not made until March and by then many people had taken all of a portion of their RMDs. Later that year, guidance was issued that said that RMDs taken earlier in the year could be returned so a good number of people did just that – they returned the unneeded RMD.
The issue that is now cropping up is that those people are now receiving 1099s showing the full amount of the distribution – even though some or all of the money was returned.
The 1099 Form was not sent in error – it is correct. It is up to the taxpayer to declare the returned RMD as a rollover on their 2020 tax return. If the taxpayer forgets to note that the RMD was returned (or if the taxpayer’s tax preparer is not aware that the RMD was returned) then the full amount of the distribution can end up being taxed even though the money was returned. Not a good situation!
I worked with Ann Carrns of the New York Times on this article which explains the intricacies of the problem and how to correct the issue. Paying taxes on IRA withdrawals is one thing -- paying taxes on a withdrawal that you took but later returned is a double whammy that can easily be avoided.