IRA Distribution/Rollover

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  • #5433
    Cares Act Guy
    Participant

    Two questions about the CARES Act distribution rule:

    1. Assume a qualified individual takes a $100,000 IRA distribution and plans the 3-year rollover. First, the Act says they must be eligible for the rollover. I assume this requires that they have not otherwise taken a rollover distribution within the past year. So let’s say they had a 9-15-2019 distribution that was rolled within 60 days. They must now wait until 9-16-2020 to take the $100,000 to maintain the option of the 3-year rollover? Otherwise they just get the 3-year spread of income?

    2. If they choose the 3-year rule and make a series of contributions to satisfy the rollover, and the series takes place over 3 years, does the one-year rule still apply as of 9-16-2020? That is, they can dribble money back in a 3-year reinvestment and still use another 60-day rollover in 2021 that might overlap with the 3-year one?

    #5435
    Alan S.
    Participant

    1) The 3 year rollover option only applies to a corona virus distribution (CVD) that meets the requirements for such a distribution. If those requirements are met, those distributions can be rolled back over 3 years and are exempt from both the 60 day deadline and the one rollover rule for 12 months. This is done by deeming the rollover to be done by direct transfer (basically not counting the return of funds as a rollover). Therefore, this example is not impacted by the 2019 rollover as long as the 2020 distribution qualifies as a CVD.

    2) No. Included in above explanation. A 2020 CVD in which the income is reported over 3 years is still taxable until the taxpayer reports the later rollover. The rollover after 2020 will trigger various options regarding if the earlier return is amended for a refund, if the current year tax due is reduced, or even a carry forward income reduction is elected. All this assumes the IRS Rules for 3 year rollovers track the existing provisions for disaster distribution 3 year rollovers. Very complex and filing intensive.

    #5437
    Cares Act Guy
    Participant

    Thank you Alan.

    Just to clarify, and assuming this is the same as disaster distributions.

    May 1, 2020 taxpayer takes a $100,000 distribution that is qualified. By 10-15-2021 (and after extending the 2020 return), they repay $55,000. By 10-15-2022, and after extending the 2021 return, they repay $15,000. By May 1, 2020 they repay $15,000. $15,000 is never repaid.

    Then (1) $45,000 2020 income which is spread over 3 years, so $15,000 reported in 2020 return. (2) The $15,000 payment in 2021 reduces the taxable amount to zero for 2021. (3) The $15,000 payment in 2022 reduces the taxable amount to zero.

    So in this example no amended returns but $15,000 income is reported in 2020.

    is this correct – if it follows disaster rules?

    #5441
    Alan S.
    Participant

    Did you mean to show 5/1/2023 as the last repayment date?
    If so, when applying the “Repayment of qualified disaster distributions under 3 year method in Pub 590 B, I come up with a different result:

    Dist 100000, therefore taxable amount is 33,333 for each year without any repayment.
    Then 55000 repaid by extended due date for 2020 reduces 2020 reported income to 0 and generates a carry forward amount of 21,667 to 2021.

    21,667 plus 15000 repaid by extended due date for 2021 exceeds the 33,333 taxable amount for 2021, reducing 2021 income to 0. 3334 is left to carry forward to 2022.

    Taxable income on 2022 return would be 33,333 – 3334 carryforward from 2021-15000 repayment on 5/1/2023 = 15,000 taxable income on 2022 return.

    In summary taxable income for 2020, 2021, and 2022 would be 0,0, 15000.

    NOTE: Since CARES provisions track the disaster distribution rules almost totally, it is assumed that the repayment and tax reporting will follow what is already posted in recent Pub 590 Bs. But it is still possible for the IRS to make some modifications since CARES leaves the details to the IRS.

    • This reply was modified 4 months ago by Alan S..
    #5443
    Cares Act Guy
    Participant

    OK, makes sense. yes I did mean 2023.

    #5444
    Cares Act Guy
    Participant

    And one more “gut feel” thing if you don’t mind.

    In the absence of a positive test, which will not apply if someone is not positive or even if the test is unavailable to that person (asymptomatic or mild), then it is necessary to experience adverse financial consequences.

    Most people will experience one of the listed events, such as work hour reduction or even fewer hours for an independent contractor. I realize the adminsitartor “may” rely on the participant representaion, but what do you think will actually happen when an entity such as Fidelity/Vanguard…and so on gets a contribution outside of the 60 days that the participant represents is a return of the Corona distribution? Will they accept that representation? If not, then what?

    I assume further guidance will be out shortly but there seems a need to have some type of protection beyond the administrator “may” treat it as qualified. These people often seems very clerical in their approach. And also quite sure they understand the rules best.

    #5445
    Alan S.
    Participant

    Some consultants feel that some plans may hang back to see what the demand level is from their employees before they adopt CV distributions or expanded plan loans. They are also free to adopt a more restrictive version than the CARES Act allows, eg not accepting rollbacks after the due date the extensions for 2020.

    But once they agree for the first employee, they must then amend the plan by the deadline to do that. CARES allows employers and IRA Custodians to accept an employee certification of eligibility without requesting further documentation, and there is little chance that the IRS will request documentation.

    I agree that the IRS needs to release further guidance ASAP, even if they will have to amend that guidance after the next relief bill.

    #7287
    Lewis-H
    Participant

    The 60-day rollover rule applies to indirect rollovers of all or a portion of the assets in a qualified retirement account, such as an IRA or 401(k). Essentially, once you take a distribution from your account, you’ll owe no interest or penalties if it is redeposited into a qualified retirement account within 60 days.

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