Many folks took advantage of the fact that required minimum distributions (RMDs) from qualified accounts were suspended in 2020 due to the CARES Act. Some people stopped their distribution ahead of time, while others received their distribution and then decided to roll the money back in if they did not need it. With tax season upon us, the question top of clients’ minds is “what can I expect for tax documents this year?”
What Forms Can I Expect?
While the CARES Act allowed for the temporary suspension of RMDs, it did not change tax reporting procedures. If you are someone who received a distribution but then rolled the funds back into the account, you can expect to receive both a 1099-R and a form 5498 for tax year 2020. You will want to provide both forms to your accountant, as the 1099-R shows the amount of the distribution and any taxes that were withheld, and the 5498 shows contributions to the account, including rollovers. Thus, the forms will offset each other and provide the supporting documentation for the transaction. If you stopped your RMD before receiving any funds (and no other distributions or contributions were made during the year), you should not expect to receive either form.
What If Taxes Were Withheld?
It is very common for clients to have taxes withheld at the time of distribution from a qualified account. If tax withholding is selected, a certain percentage of the distribution will be applied to both federal and state income taxes and sent directly to the government, with the net amount sent to the client. In this scenario, the client could not reclaim the income taxes that were paid directly as part of the distribution. They had the option to add the amount paid in taxes back to their qualified account using cash on hand, or to wait and reclaim the additional taxes paid when they file their tax returns. For example, if a client took a gross distribution of $20,000 and, after taxes were withheld, received a net distribution of $15,000, they will receive a 1099-R showing the distribution of $20,000 with $5,000 allocated to income taxes. The 5498 will show the rollover contribution back to the account of $15,000. This is proper reporting.
Currently, the Appropriations Act of 2021 (Coronavirus Stimulus 2.0) does not include the continued suspension of RMDs. Therefore, we expect business as usual in this regard, with clients resuming their normal RMD schedule for 2021. Clients should consult with their financial advisor and accountant on any specific 2020 questions, or to strategize for 2021 and beyond.
The information contained in this post is not intended as investment, tax or legal advice. StrategicPoint Investment Advisors assumes no responsibility for any action or inaction resulting from the contents herein. Kristina’s opinions and comments expressed on this site are her own and may not accurately reflect those of the firm or our parent company, Focus Financial Partners. Third party content does not reflect the view of the firm and is not reviewed for completeness or accuracy. It is provided for ease of reference.