One 60-day rollover plus $100K coronavirus withdrawal redeposited within 3 years | Ed Slott and Company, LLC

One 60-day rollover plus $100K coronavirus withdrawal redeposited within 3 years

If someone qualifies for the $100K coronavirus withdrawal in 2020 that can be redeposited within 3 years, I assume they are also still eligible for one 60-day rollover per year. I would think that many people will qualify for the $100K/3-year benefit and that no doctor's certification would be necessary. It does not sound like you will have to prove a full $100K in harm in order to withdraw $100K under this program, is that the way you understand it?

Yes, rollovers of a Corona distribution will be treated as direct transfers, however a 5498 Box 13 will be issued. Therefore, these rollovers will not be counted toward the one rollover per 12 month limitation. While the last "general" definitions of these distributions will have to be further defined by the IRS, it looks like out of practical necessity these rollovers will be available for almost everyone. Any enforcement as usual will be mostly at the IRA custodian level. Perhaps the IRS will develop a form to be completed at best before a custodian accepts the rollover as the custodian is going to have to code it as prescribed.

Can multiple coronavirus-eligible IRA withdrawals be made from the same and/or different IRA accounts and can the eventual redeposits be made to multiple accounts in different amounts than the individual partial withdrawals?  Are only traditional IRA funds eligible for coronavirus withdrawal/rollovers, or are Roth IRAs also eligible?Thanks. 

Yes, multiple distributions limited to 100k can be made through 12/30/2020 and can be rolled back to different types of eligible accounts through the end of 2023. Roth IRAs are not eligible as either distributing or receiving (conversions) accounts.

  • Can the $100k withdrawal be re-deposited in any sequence during the 3 years - so long as it's all back in by the end of the 3 year period?
  • So if I withdraw $100k from my IRA in 2020, it has to be put back in my IRA by 12-31-2023?
  • So, for example, I COULD put all $100k back in December of 2023?

 

Yes, the withdrawals or a portion thereof can be rolled over anytime in the 3 year period. But the 3 year period ends 3 years from the day after the distribution was received, so that period would probably end prior to 12/31/2023. For example, if you received a distribution today, it would have to returned by 4/1/2023. Then you would have to amend your 2020 return, and also your 2021 and 2022 returns if you had selected the option of reporting the distribution income equally over 2020, 2021, and 2022.

So could $30,000 be withdrawn on April 1st, another $30,000 withdrawn on July 1st, a 60-day rollover be made from August 1 to September 30, a $40,000 withdrawn on December 1st (for a total of $100,000 in coronavirus withdrawals), $20,000 redeposited on February 1, 2021, $25,000 redeposited on March 1, 2022, $35,000 redeposited on June 1, 2023 and $20,000 redeposited on October 1, 2023?

Sounds OK since all distributions are rolled back within 3 years. The number of amended returns that will have to be filed will be 3 if a rollover is done in each year and the income is reported equally in each year, but if the income is all reported in 2020, only the 2020 return would have to be amended. This assumes all distributions qualify as corona virus related distributions. I would avoid trying to mix CV related and normal distributions, as that would produce a can of worms.

Alan, I don't understand why any amended returns would be required if the entire $100,000 is redeposited into IRAs within 3 years.  Is that because the withdrawals are only classified as coronavirus-eligible at the end of the process?  If so, it sounds like you're saying that taxes will be due on the 2020 income tax return and amended returns will be needed to obtain a refund.

  • For a CV related distribution, the taxpayer can opt to either report the taxable income in 2020 or equally from 2020 through 2022. If rollbacks are then done after 2020, an amended return will be needed to reduce the taxable income that was reported in prior years. For example, if taxpayer elects to report the taxable distribution equally over 3 years, and rolls back the distributions in 2022, they will have to amend the 2020 and 2021 returns to report the later rollovers that reduce the income in those years. 
  • CV distributions are so defined on the date of the distribution or as determined by the IRS, and Congress could further expand the definition to be retroactive. Perhaps later it appears that all taxpayers are affected indirectly, and if so doing away with all the documentation requirements and defining all distributions taken in 2020 as CV related would simplify things, since everyone is being affected in one way or another. The IRS also has the authority to make regulations without further legislation on this matter. However, a distribution cannot be rolled back after 60 days unless it is already clear that the distribution was CV related. 
  • It appears that the distribution reporting will default to the 3 year equal split, but taxpayer can opt to report the entire distribution in 2020 (similar to how 2010 conversions were treated) by the due date for 2020 returns. The election cannot be changed after that date. The election made will affect how many returns must be amended in the case of rollbacks in 2021-2023.

Let's say $40,000 was withdrawn in January from an IRA, as an RMD at the time. Now it is no longer an RMD, but it is past the 60 window to redeposit it. Can the $40,000 be classified as a CV distribution. I know that there would be an option to only pay the taxes in 2021-23 and it can be redeposited in the account for up to 3 years. My question is can the $40,000 be redeposited in 2020 (during the 3 year allowable period), thus wiping out the income for tax purposes in 2020?

Yes, the total distribution can be rolled over in 2020, and just reported as a normal rollover on Form 1040. But the distribution must qualify as a CV distribution, and other than directly impacted taxpayers, the qualifications are yet to be firmed up. As time goes on, the IRS will define the other situations under which those not directly impacted will qualify for a CV distribution. Eventually, they may just allow all 2020 distributions to be so qualified. There will be a self certification form to be completed, so it appears custodians will accept the word of the taxpayer. As a CV related distribution, the 60 day deadline and the one rollover per 12 month requirements are avoided. Even if it takes until next year for the requirements to broaden enough, the rollover could still be done, but the 2020 return would have to be amended to report the rollover and secure a refund.

Alan, this sounds nuts to me.  If the intent of the coronavirus 3-year rollover is to help people in a time of need, then forcing them to initially pay income tax on the withdrawal, requiring them to file amended returns and possibly subjecting them to higher Medicare premiums doesn't seem like the most effective way to do it.  If you or Ed have any input into this, please ask the IRS not to require 2020 income tax payments or amended returns for rollovers completed within 3 years.

The CARES Act exempts coronavirus-related distributions from the mandatory 20% tax withholding that would otherwise apply to an eligible rollover distributions from qualified retirement plans.  Of course tax withholding would already have occurred on such distributions that occurred prior to the enactment of the CARES Act.  Also, a need to amend prior returns is potentially reduced by the fact that these distributions can be spread over 3 tax years.  The need for any amendments would be determined by how promptly the distributions were repaid.

Alan, one other comment.  If you have the ability to comment on the implementation of this program, please ask that Roth IRAs also be included.  This would simplify the tax implications and offer more flexibility for people who need help.  As a side note, I had my 70th birthday earlier this year and if I make use of this program, I will have funds available from my age 72 (2022) and age 73 (2023) RMD's to complete my coronavirus 3-year rollover.  Thanks.

I suspect that Roth IRAs were not included for 2 reasons. First, there are no RMDs to roll back so anyone that took a distribution did it voluntarily. They also likely did not want anyone converting CV distributions to Roth and then paying taxes over 3 years, since the main purpose of the CARES Act was to make retirement plan distributions available without penalty for current needs, not to simply transfer pre tax funds to a Roth IRA. It's possible that the eligible plan list will be expanded, but I wouldn't count on it. One thing they didn't do is allow 2019 conversions to be recharacterized, since those conversions have likely suffered big losses and now the taxes are due. But that didn't happen.

 

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