If you take a covid qualifying IRA distribution can you still take a deductible IRA contribution

[cjob]

Took a Covid qualifying IRA distribution in 2020.  Re-contributed most of it in 2020 and prior to 4/15/2021.  Can I consider part/all of the re-contribution a deductible IRA contribution for 2020 (subject to income limits, etc).    TT is permitting a full deduction IF I consider the fully deductible contribution to have been made in 2021 prior to 4/15/21.  TT is limiting the deduction if I consider only part of the IRA contribution as having been made in 2021 (prior to 4/15).  The distinction is it measures AGI for the limited deduction scenario with an inclusion of 100% of the covid distribution (even though the option for 1/3 taxation has been elected).  What I am not understanding is why it doesn't do the same for the first scenario where it permits a full deduction.

So my first question, is:  Must all of the contributions for 2020 be considered partial repayment of the covid distribution or are any eligible to be designated as a deductible contribution?  My second question is:  Why is TT distinguishing between the two scenarios described above?  Why aren't both fully deductible or both partially disallowed?  What is the distinction between a portion being contributed in 2020 versus all in 2021?  By default are calendar year 2020 contributions considered repayments?  Is this a TT thing or an IRS restriction?  

Many thanks for anyone's thoughts.

[WendyN2]

No, I have not read or heard anywhere of this being an IRS restriction. Having taken the money out for need and receiving the "benefit" of not being penalized for doing so has no bearing on turning around and contributing back in. Totally different "dollars" in tax terms, so to speak. It appears as though you might have found a little loophole. So, to answer your question, no by default as you stated 202 contributions are not to be considered repayments. More like replacement. 

[fanfare]

you do not have to designate it repayment but you have to let the financial institution know what you are doing.

If you contribute for 2020, or for 2021, you must have sufficient compensation to allow that.

if you want to deduct it, you must be under the income limits.

if you take out and then contribute the same deductible amount,  in other words, nothing happened..

it only works because the 10% penalty is waived in 2020.

It is not a loophole.

[cjob]

Thank you Wendy.  Yes.  I'm not seeing any reason why I can't consider part of the re-contribution to be deductible IRA and part be designated as "repayment".  Basically, just looking for other thoughts since I thought it odd not to have been addressed to date.  What is very odd to me is the different treatment by TT when I change which contributions I designate as repayment and which as deductible IRA.... 

That all said, it's a moot point currently since I believe if I let the excess 2020 "repayment"  rollover to 2021 I will benefit by reducing the TI in a higher tax bracket year.  So even considering time value of money, letting it rollover as opposed to being a 2020 deductible IRA contribution yields a significantly better result.

[cjob]

Thank you Fanfare.  

Yes, income threshholds are met etc. for the contribution to be designated as deductible IRA.  And the 10% penalty is N/A in this situation.  

The amount taxable in 2020 is significantly less than the amounts "repaid"/"re-contributed", hence the pondering of offsetting the 1/3 inclusion with a portion of the "repayment" and then designating the remainder as a deductible IRA contribution for 2020.  Not seeing anything as yet that prevents this.  But as I said to Wendy, I discovered I'm better off letting the "excess 2020 repayment", rollover to 2021 and offset the 1/3 inclusion in that year in a higher tax bracket.

[macuser_22]

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@cjob wrote:

Thank you Wendy.  Yes.  I'm not seeing any reason why I can't consider part of the re-contribution to be deductible IRA and part be designated as "repayment".  Basically, just looking for other thoughts since I thought it odd not to have been addressed to date.  What is very odd to me is the different treatment by TT when I change which contributions I designate as repayment and which as deductible IRA.... 

That all said, it's a moot point currently since I believe if I let the excess 2020 "repayment"  rollover to 2021 I will benefit by reducing the TI in a higher tax bracket year.  So even considering time value of money, letting it rollover as opposed to being a 2020 deductible IRA contribution yields a significantly better result.

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If you elected to repay it over a 3 year period then it is a *repayment* that is different from a contribution.   

Repayments or any other money form a tax deferred retirement account cannot be used as a new IRA contribution.

Of course you can repay the money to the IRA and also use other taxable compensation (money that you worked for) to make a separate IRA new contribution that might be deductible if your AGI allows a deduction.

They are different things.

[cjob]

Thank you Macuser.  Correct they are different concepts which is why I believe it can be done.  At least I have not found anything that prevents this approach.

Example:

20,000 Covid qualifying contribution.  Elect 1/3 taxable so 6667 included 2020, 2021 and 2022.  Prior to 4/15/2021 deposits of 14,000 made back into the same IRA.   I am not seeing anything that is preventing the   designation of 7000 of the 14000 as a "repayment" of the Covid distribution (and thereby eliminating the current year TI impact of the distribution) and designating 7000 as a deductible IRA contribution (presuming all other criteria for deductible IRA contributions are met).  IRS Notice 2020-50 appears to be silent on this.   Nothing prevents this treatment that I can discern.