Repaying early IRA withdrawal (without penalty)

Submitted by Leo Ioffe on Wed, 2020-07-08 18:35

Hi

I am 58 years old and had to take $20000 out of my IRA account in April 2020. Subsequently I was able to find a different source of funds and would like to repay this money to avoid the early withdrawal penalty. The 60 day period for repayment without a penalty is already over. My bank has no clue if or how the CARES Act affects this, hence I came to this forum to seek some guidance. I am unable to decipher the multitude of IRS publications to my satisfaction.

Thank you.



Submitted by David Mertz on Wed, 2020-07-08 20:03

  • Under the federal disaster declaration made by the President as a result of the pandemic, the normal 60-day deadline to roll the distribution over has been extended to July 15, 2020 without any regard for the CARES Act.  However, a rollover based only on this extension would be subject to the one-rollover-per-12-months limitation.
  • Under the CARES Act, if you are an individual qualified to take a Coronavirus-Related Distribution, you have 3 years from the date of the distribution to repay the distribution, without any regard for the one-per-12-months rollover limitation.  https://www.irs.gov/newsroom/relief-for-taxpayers-affected-by-covid-19-who-take-distributions-or-loans-from-retirement-plans


Submitted by Alan - IRA critic on Wed, 2020-07-08 20:25

  • You can roll this distribution back to your IRA, but no later than 7/15/2020, and in order to be able to do this you cannot have rolled over any other IRA distribution you took after April, 2019. This is the “one rollover per 12 months” limit.
  • Therefore, if you have not already used up your one rollover earlier, you have one week to get this done. This is authorized by IRS Notice 2020-23 (link below). See p 8 of the Notice which states that time limited deadlines after 4/1 are extended to 7/15. Originally, you deadline was 60 days from the distribution you took, so this relief gives you additional time, but only one week is left. Banks are not good at interpreting the rules, so all you can do is show them a copy of this Notice and direct them to p 8. If they still will not accept the rollover, you can roll it to another IRA you have or open one to accept the rollover, so you need to get on this right away.
  • https://www.irs.gov/pub/irs-drop/n-20-23.pdf


Submitted by Leo Ioffe on Wed, 2020-07-08 21:40

Thank you. I had no idea there was a 2020-23 notice related to this. I only read the 2020-50.So assuming I meet the 7/15 deadline, I will owe no early withdrawal penalty for this early withdrawal?



Submitted by Alan - IRA critic on Wed, 2020-07-08 23:13

Correct, except that you will also not owe any taxes or penalty. Unless you are in the lowest tax bracket, the taxes you would owe would be more than the penalty. Complete this rollover and you will not owe either tax or penalty.



Submitted by Leo Ioffe on Thu, 2020-07-09 13:14

Thank you very much.



Submitted by Leo Ioffe on Wed, 2021-02-03 20:26

Hello  got my year end tax statement for this IRA. Of course, this withdrawal shows up as taxable. I rolled it back on 7/13/20. Did they make a mistake in reporting it this way? Of is this something that I need to clarify on the tax form when filing? 



Submitted by David Mertz on Wed, 2021-02-03 21:03

The reporting on the Form 1099-R is correct.  It’s made nontaxable by how you report it on your tax return.  The full gross amount must be included from the amount on Form 1040 line 4a but the amount rolled over is to be excluded from the amount on line 4b.  Also include the word ROLLOVER next to line 4b.



Submitted by Leo Ioffe on Wed, 2021-02-03 21:09

They also mentioned that the rollover will be indicated on form 5498, but that form does not go out until end of May. Assuming no filing deadline extension this year, it means I will file before 5498 goes out. Does the IRS just take my word for it that I rolled it back? Does this rollover also affect my state taxes (NJ) in the same way as federal? Meaning nothing owed on it?



Submitted by David Mertz on Wed, 2021-02-03 22:12

Yes, the IRS takes your word for it, at least initially, but the IRS automated underreporting system will eventually check for a Form 5498 indicating that the rollover was completed.  That checking would normally be done much later than the filing deadline for the tax return.  The rollover essentially undoes the distribution, so the amount rolled over does not appear as taxable income on either your federal or state tax return.  Still, retain your records of the rollover in teh unlikely event that the IRS has any questions about it.



Submitted by Leo Ioffe on Wed, 2021-02-03 23:08

You guys are the best.



Submitted by Leo Ioffe on Wed, 2021-04-28 18:41

Any idea why NJ seems to want to tax this?



Submitted by Alan - IRA critic on Wed, 2021-04-28 18:59

Looks like the NJ 1040 Inst state that an IRA distribution that was rolled over should not be reported on lines 20a or 20b.  Were they?



Submitted by Leo Ioffe on Wed, 2021-04-28 23:29

I use turbo tax to do my taxes. federal was fine, line 4a has the amount, 4b says ROLLOVER, nothing got taxed. when I got to NJ, it must have detected a ROLLOVER and asked me the following question “Was any of this rollover to a SIMPLE IRA?” if I answer No, it’s not taxed. if I answer yes, and enter the entire amount, it calculates the tax due. come to think of it, this is not a rollover to a SIMPLE IRA, is it?



Submitted by Alan - IRA critic on Thu, 2021-04-29 01:31

No, unless it actually is a SIMPLE IRA.



Submitted by Leo Ioffe on Thu, 2021-04-29 22:25

It’s just an ira I have that is a result of many years of rolling over various employee 401k, etc. 



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