CARES ACT (IRA Withdrawal and Re-Deposit within 3-years)

[Dofdear]

Under the new CARES Act there appear to be rules that allow up to a $100K withdrawal from an IRA for COVID-19 impacts.  My questions are;

1) What is the definition of COVID-19 impacts

2) What will the mechanics be for redepositing the withdrawal within 3 years since this would go over several tax years

3) Do these rules apply to the 401K style TSP where I could withdraw from the TSP and re-deposit into a traditional IRA.  Again, what would the mechanics be if done over several tax years

4) My spouse and I own a Vanguard Variable Deferred Annuity account.  Can I withdraw from this type of insurance account and within 3 years redeposit into a traditional IRA, and what are the mechanics

Thanks in advance for any insight on what appears to become a complex tax situation.  dofdear aka BillyBob

[ReginaM]

All we know right now is  the Penalty is Waived for Early Retirement Withdrawal.

If you need to take money out of your retirement plan ASAP, keep in mind that the 10 percent early withdrawal penalty will be waived on up to $100K of retirement funds withdrawn. 

Additionally, income attributable to such distributions would be subject to tax over three years, and you may re-contribute the funds to an eligible retirement plan within three years without regard to that year’s cap on contributions.  Rules and regulations on this will unfold as we move forward.  Here is a link to the IRS Corona Virus Update for you to keep track of these changes.

Also, here is an interesting article that you may want to look at: Forbes: Everything you want to know about the no penalty withdrawal

[Dofdear]

So let's say I take out money in 2020 and re-deposit or roll-over in 2022.  What would the take implications be in 2020 and 2021 and would I be able to recoup any taxes attributable to the withdrawal if I had to pay any additional taxes prior to the re-deposit / roll-over?  In other words would I need to file an amendment of 2020 and 2021 or is there going to be some other method to report and avoid current year taxes?  Thanks    dofdear aka BillyBob

[DavidD66]

My guess is that, in your scenario, you would be able to take a credit for the taxes paid in 2020 & 2021 on your 2022 tax return when you indicate that you had re-contributed the funds to a qualified plan.  Amended returns have to be printed, mailed, and manually processed, so I doubt that is the way they would want to handle it.  Creating a new form and issuing tax credits would be much more efficient for everyone.

[Dofdear]

Thanks for the response.  My first question remains unanswered;

1) What is the definition of COVID-19 impacts

Obviously if you, your spouse or a dependent becomes ill then you are impacted.  If your business is closed or you are furloughed / laid-off then I assume your are impacted.  Here is our situation and concern;

Have 2 adult non-dependent children, their spouses and 7 grandchildren.  They are all laid-off and no income.  They applied for unemployment insurance but that does not cover the basics.  We want to step in and assist but the method of that assistance could vary based on several factors.  If this situation would be considered a COVID-19 impact then that would allow access to the IRA on a tax-free basis if re--deposited within the 3 year limitation.  So again,  What is the definition of COVID-19 impacts?   Thanks, 

[JohnB5677]

CARES Act: Among its many retirement plan provisions, for individuals (employees, their spouses, and their dependents) who have been diagnosed with COVID-19; who have experienced adverse financial consequences as a result of being quarantined, furloughed, or laid off; or who have otherwise lost income (including because of having to be home to provide child care), the CARES Act offers the following benefits with respect to early withdrawals:

1. The 10% penalty is waived for distributions up to $100,000 or the retirement account’s balance;

2. The withdrawal can be from an IRA, in addition to defined contribution plans, such as 401(k)s; and

3. The amounts of the COVID-19 withdrawals can be repaid to the employee’s qualified plan or retirement account (e.g., IRA, SEP, and/or Simple IRA) and, to the extent such repayment occurs within three years, the amounts repaid will not be subject to tax (until, of course, withdrawals are again made in the normal course).

Please see article in National Law Review

[albrecht]

If I have a sizable 401k; still working with the same employer.  I have always wanted to 'roll-over' money to say a IRA outside of my current institutional provider  (don't love all the investment options), especially maybe a Roth IRA, but my plan really restricts this, and contribution limits.  Possibly an opportunity to legally move $$ with no penalties, tax liability that some might never get?   If I take out early an distribution now (2020), and assuming I decide to 'repay' in the same calendar year (2020), my understanding I would not be subject to income taxes, if I understand this correct.  I assume that I could 'repay' to another retirement account-such as a traditional IRA or Roth IRA, outside of my current employee $401k.  My rationale would be that this would be a an opportunity to diversify to possibly other investments programs/vehicles that my current 401k offer.  I am not allowed to contribute to a ROTH IRA (income limits)--is this an opportunity that one could transfer essentially $100,000 to a Roth IRA with no penalty, tax consequences?  

401k to traditional IRA?  Can I repay into this.

401k to Rota IRA?  Can I repay into this vehicle without tax consequences?  Seems like this would be unlikely?

[DaveF1006]

If you withdraw and complete the rollover within 60 days, you can rollover the 401K into  a Traditional IRA. You would not be able to rollover into a Roth IRA account without tax consequences. This is called a Roth conversion. 

[Chris1997]

That sounds like maybe the normal rule for rolling over a 401(k) from a former employer into an IRA? The CARES Act apparently gives you three years to recontribute. I have the same questions as the poster above, in that I am wanting to "liberate" money from my current employer's 401(k) plan and recontribute it into a Traditional IRA under the provisions of the CARES Act. Do we know if the funds have to be re-contributed to the same 401(k) plan (if that's even an option), or can they be re-contributed to a Traditional IRA instead?

[joeblu2]

Hello,

In 2020 I withdrew money from my Rollover IRA before the IRS waived the RMD for 2020. I redeposited the exact same amount back into my Rollover IRA within the 60 days allowed to avoid being taxed. I received the 1099R for the Rollover IRA distribution. Where do I enter the contribution to my Rollover IRA on the IRS 1040 so I do not have to pay tax on the IRA distribution?

Thank you

jb

[DawnC]

Enter it in the same place - but when you get to the question about it being for an RMD - answer NO, none of this was for an RMD, and then a few screens later, you will be asked what you did with it.   But yes, delete the 1099-R and start a new entry.  If you try to edit the one you already entered, it won't give you the RMD questions.  

Since RMDs were waived for 2020, no part of the distribution was actually an RMD even though it was taken with the intention of satisfying an RMD.  In TurboTax, indicate that the distribution was not an RMD.  Indicate that you moved the money to another retirement account (or returned it to the same account), then indicate how much of the distribution you returned to the IRA.  TurboTax will include the entire gross amount on Form 1040 line 4a but exclude the amount rolled over from the amount on line 4b.  TurboTax will also include the word ROLLOVER next to the line.

If you did not substitute other funds for the amount withheld for taxes so as to complete the rollover of the entire gross amount of the distribution, the amount of the withholding remains distributed, not rolled over, and subject to tax; it's too late to complete a rollover of that portion of the distribution.  If the overall tax liability determined on your tax return is less than your total withholding, including the amount withheld from the IRA distribution, you'll get a tax refund.    @joeblu2

[Luctexas]

I took out 96,000 out of my IRA during the covid crisis.

I am self employed.

i am doing my taxes on turbo tax and entered in the 1099-r from fidelity but i dont see anythwhere where i can split the distributions over a 3 year period and how to avoid the 10% penalty.

Please advise how to do that and where to go.

Thank you

Luc

[Irene2805]

To indicate that the distribution was a qualified disaster distribution, on the screen after the 1099-R entry screen, Tell us if any of these uncommon situations apply, mark the box 

I took out this money because of a qualified disaster (includes COVID-19) and click Continue.  

Unfortunately, IRS instructions related to disaster distributions aren't yet ready to be included in this section of TurboTax, so you will have to revisit this area later to finish the entries.

[Luctexas]

Thank you.

Another question.

I cant seem to be able to find where i can average the income over a 3 year period in turbo tax.

Please let me know how to do that.

Thank you,

Luc

[Irene2805]

To indicate that the distribution was a qualified disaster distribution (and spread the tax out over three years), on the screen after the 1099-R entry screen, Tell us if any of these uncommon situations apply, mark the box I took out this money because of a qualified disaster (includes COVID-19) and click Continue.  

Unfortunately, IRS instructions related to disaster distributions aren't yet ready to be included in this section of TurboTax, so you will have to revisit this area later to finish the entries.

@Luctexas