ROLLOVER RULES AND REPAYMENT OF CRDs: TODAY’S SLOTT REPORT MAILBAG
By Ian Berger, JD
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I have faithfully read the Slott Report for a long time. I must thank you for sharing your knowledge. However, it is finally my turn to write you with a question.
I was quite fortunate to work for a company with an employer 401(k) plan. So, I faithfully contributed for years and now have both 401(k) and Roth 401(k) — principal and earnings — to retire on. My employer’s plan rules state that after I retire, I must take it all or nothing.
The plan’s fund manager informs me I can make a direct transfer of all my pre-tax 401(k) funds into my personal IRA and all my Roth funds into my personal Roth IRA. The manager says this can be done with no taxes due.
Please confirm that by doing such transaction, I will not infringe on the IRS rules which limit direct transfers to only one per year. And, that no taxes or tax withholding will be required.
Thank you much,
Congratulations on your retirement! The IRS once-per-year limit applies only to 60-day rollovers — not to direct rollovers like you’re doing. (The rule also only applies to IRA-to-IRA or Roth IRA-to-Roth IRA rollovers — not to 401[k]-to-IRA rollovers.) So, you don’t need to worry about the once-per-year rule.
You won’t be taxed when you do the direct rollovers, but you will have to pay taxes on one or both IRAs when you withdraw from them down the road. Also, 20% withholding for income taxes doesn’t apply when you do a direct rollover.
Do you have to pay back all of the $100,000 in 3 years to get any of the tax benefit? What if you fall short of paying it all back? Is it ALL still taxed?
It sounds like you took a coronavirus-related distribution (CRD) from your IRA or company plan in 2020.
If your CRD came from pre-tax finds, it is fully taxable. However, taxes on the CRD will automatically be spread out evenly over your 2020, 2021 and 2022 tax returns — unless you make an election with your 2020 tax return to have the entire amount taxed in 2020.
You do have 3 years to repay all or part of the CRD. But even if you only repay part, you’ll recover taxes already paid (or offset taxes due in the future) on that portion. So, there’s definitely a tax benefit to paying even part of the CRD back.
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