Repaying CRD prior to 2020 tax filing date with funds from an IRA distribution in 2021 | Ed Slott and Company, LLC

Repaying CRD prior to 2020 tax filing date with funds from an IRA distribution in 2021

In order to have access to IRA funds this year, but essentially pay taxes on them on my 2021 income tax return rather than my 2020 return, could I repay this year's CRD distribution with money from an IRA distribution taken in early 2021, prior to filing my 2020 return? If I do this, is there some CRD coding that the financial institutions need to do (1) when the money is withdrawn in 2020; or (2) when the money is repaid in 2021? Thanks.

Assuming that this follows the protocols for other qualified disaster distributions:

  • Yes, you could do this.  If you choose to spread the CRD over 3 years, you could do even use this repayment method over 3 years.  The effect would be to recognize 1/3 of the taxable income in each of the years 2021, 2022 and 2023.  This might make particular sense if you will be are subject to RMDs in those years and will be receiving distributions anyway.
  • There would be no special coding on the distributions.  It's up to you to be able to substantiate, if asked by the IRS, that you were eligible to receive the CRD.  The distribution made in 2021 will not be subject to any special tax treatment, it will be an ordinary distribution, so you wouldn't want to do this if the distribution in 2021 would be an early distribution subject to penalty.
  • The amount deposited explicitly as a CRD repayment would be shown in box 14a of your 2021 Form 5498 and box 14b would show the code indicating that the repayment was of a disaster distribution.  (Code DD is used for repayments of other types of disaster distributions and perhaps the same code will be used for repayment of a CRD).  Be sure that the financial institution is aware that it's a repayment of a CRD so that they report it properly on the Form 5498 for the year in which the repayment was made.

I am currently 70 years old.  I maxed out my Roth Conversion up to the top of the 12% tax bracket very early in 2020, before the impact of the coronavirus, therefore taking more 2020 taxable income is undesirable.  Can the CRD be made in multiple steps totaling $100,000 or less, as needed throughout the year, rather than being limited to a one-time distribution?

Also, are distributions from both Traditional IRAs and Roth IRAs eligible for this program?

Yes, once you qualify for a CRD, you can take as many distributions as you wish, up to 100k total. Each such distribution has a repayment deadline of 3 years from the date you received the particular distribution and you can either report the income entirely in 2020 or 1/3 each 2020-2022. Both TIRAs and Roth IRAs in addition to employer plans can distribute CRDs. 

So if I understand correctly, CRDs all from Roth IRAs could be repaid using RMD funds withdrawn in the year 2022.  Is that correct?  

Yes, but does doing so make sense?  Any gains in investment value between the CRD and the repayment would be taxable gains in the traditional IRA instead of nontaxable gains in the Roth IRA.  If you anticipate significant gains, it seems like it might make more sense to take the CRD from the traditional IRA, except that that would result in a temporary tax liability if not paid back in three equal parts prior to filing your 2020, 2021 and 2022 tax returns.  Of course if the investments drop in value during that time, taking it from the Roth IRA does make sense.  However, one generally makes investment choices with the expectation that the investments will increase in value over time, otherwise one would probably choose different investments.

My motivation is that (1) I need some funds now; (2) I can repay the CRD with RMD funds that I'll be forced to withdraw beginning in 2022 when I turn 72, all of which I do not expect to need; (3) using a Roth IRA prevents the possibility of my 2020 taxable income rising to the point where I'll be subject to a Medicare premium surcharge; and (4) using a Roth IRA eliminates the hassle of filing an amended return.  Your point about not using after-tax money now and growing before-tax money for another year and a half is a factor well worth considering.  Thanks.

If your CRD is from a qualified Roth IRA only, you would opt to report the entire distribution on your 2020 Form 8915E, and even though your Roth is qualified, you would need to file Form 8606 as well. But if you also took a TIRA Distribution you would have to choose either 3 year income reporting for both or report the total in 2020 for both IRA types. You could not treat the IRAs differently for purposes of income reporting.  As for the repayment of a CRD from a Roth IRA you would not have to amend an earlier return even if you took the full 3 years to repay the Roth CRD since there would be no tax paid to refund. 

 

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