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Don’t Pay Tax Penalties on Money You Took From Retirement Accounts

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If you’re using tax preparation software, the document should print out with the word “rollover” entered next to the zero, Mr. Slott said. Someone completing a paper form would need to write in the word “rollover.” That will treat the withdrawal as a nontaxable event. (Usually, R.M.D.s aren’t eligible for rollovers, but the I.R.S. made an exception for 2020.)

Some clients who returned their R.M.D.s have had pleasant surprises on their tax returns, Ms. Costa said. Because their taxable income is lower than it would have been, some were able to deduct medical expenses or even qualify for the federal stimulus payments.

But if the minimum distribution isn’t properly reported as returned, those benefits could evaporate, Ms. Costa said.

“You don’t want to add insult to injury by paying taxes on a distribution that you returned,” she said.

Here are some questions and answers about R.M.D.s:

Is it OK if I kept the retirement withdrawals I made in 2020?

Yes. Returning the money was optional.

Are R.M.D.s waived for 2021?

No. The waiver applied only to withdrawals in 2020.

When do I have to start taking R.M.D.s?

It depends. A federal law passed in 2019 called the SECURE Act, for Setting Every Community Up for Retirement Enhancement, raised the starting age for taking R.M.D.s to 72, from 70½.

The new age 72 threshold applies to those who turned 70½ after 2019 — or, put another way, those whose 70th birthday was July 1, 2019, or later. For everyone who turned 70 before that date, the starting age is 70½.

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