Repayment Of Early Distribution From Traditional IRA before July 15th

[FuskieBP]

Due to financial hardship that predated the spread of the SARS-CoV-2 pandemic in March, I was forced to take two premature distributions from my Traditional IRA, one in January, the other in February, before starting a new job in March.  I am under the age of 59 1/2 and to plan ahead for 2020 taxes, withheld an additional the anticipated 25% for tax and penalty.

I have read that the CARES act signed into law at the end of March allows for premature distributions taken as a result of the pandemic to have the 10% penalty waived and the tax liability spread over multiple years. However, since my distributions took place prior to the spread of the virus, would this provision apply to me?

Secondarily, I have heard that the CARES act allows for me to return distributions from a Traditional IRA before the tax deadline of July 15th without penalty or tax liability. I thought the rule was you only had 60 days from the date of distribution. I have saved enough over the last 4 months to return some of the amount taken to my Traditional IRA  (or I could keep it as an emergency Fund).  Is my understanding of the CARES act correct and I can return some of the money and avoid penalty and income tax?

In either case, I assume that whether I can waive the 10% early distribution penalty or return some of the distribution taken, the money withheld by my broker for the IRS would simply be applied to any 2020 tax liability when I file my 2020 taxes in 2021.

[dmertz]

These would qualify as Coronavirus-Related Distributions only if you met the requirements for being an affected individual.  See SECTION 1.B of IRS Notice 2020-50 for those requirements.

Regarding the February distribution, the rollover deadline for that distribution has not yet expired.  The IRS extended the rollover deadline to July 15, 2020 for distributions made after January 31, 2020 that will have the regular 60-day deadline expire before July 15 (actually due to the federal disaster declaration by the President, not the CARES Act).  So you can roll that distribution over without that distribution being a CRD.

However, the January distribution is another matter.  Unless you qualify as an individual described in SECTION 1.B of IRS Notice 2020-50 sot that the January distribution can be treated as a CRD, the January distribution cannot be rolled over.  There is nothing in the specific wording of SEC. 2202 of the CARES Act that actually requires that the distribution be made after you became a qualified individual.

[Opus 17 · Accepted solution]

The CARES act applies to distributions taken between January 1 and December 30, 2020, if you can certify that the distribution was due to a COVID related hardship.  See this FAQ. 
https://www.irs.gov/newsroom/coronavirus-related-relief-for-retirement-plans-and-iras-questions-and-...

If you can’t certify that the distribution was due to a COVID related hardship, then you may still be able to use the disaster provision mentioned by @dmertz . Otherwise, all the normal rules about early distributions would apply including the penalty and the income tax.

[fanfare]

the bad news is that withholding in this situation is penalized for early withdrawal unless your roll it back by way of other funds.

in other words if you don't roll it all back, the remainder is still an early withdrawal.

[FuskieBP]

I was just told by TDA that this Disaster Declaration option has been extend to August 15th.  I assume that if I return the distribution amount taken in February before August 15th, the IRS will keep the amount I had withheld for tax and penalty purposes, which could mean that I would be owed a refund.

On the other hand, I expect I will have to pay back some 3 months of healthcare exchange subsidies because the job I started in March will likely make me income ineligible (I'm hoping). I switched over to my new employer's healthcare plan in March but still had 3 months of subsidized healthcare for the year.

So maybe the additional withholding will balance out the federal subsidies owed.  

Thanks all for your help.

[dmertz]

I'm skeptical about what TDA told you.  The IRS has announced (https://www.irs.gov/newsroom/taxpayers-should-file-by-july-15-tax-deadline-automatic-extension-to-oc...) that is not extending the date from July 15 to August 15, at least in regard to the filing deadline for 2019 tax returns, and I suspect that that applies to all other items that had the deadline extended to July 15 as well.  There is presently no mention on the IRS website of such a change and presently no IRS Notice published on the IRS website superseding IRS  Notice 2020-23, nor can I find any mention of such a change anywhere on the internet, including sources that I follow that report things like this almost immediately.

It seems more likely that the person who told you this is confused between the extended deadline under the disaster declaration and the August 31, 2020 deadline for those who received a distribution that would have been an RMD were it not for section 2203 of the CARES Act to repay the distribution to the distributing IRA, described in IRS Notice 2020-51 issued on June 23, 2020.

Given that the July 15, 2020 deadline has not yet passed, it makes sense to do the rollover by July 15 rather than risk having received bad information from TDA.  However, that still leaves a bit of time to get the information from a more authoritative source (the IRS) if they really did make the change.  The IRS generally makes such announcements the same day the changes occur:  https://www.irs.gov/newsroom

[FuskieBP]

I'm sorry, I'm getting push back from the brokerage on the on the question of returning the premature distribution I took on February 18th.  As I understand it, I would be completing a 60-day rollover to an IRA by July 15th despite the original deadline having been April 18th.   This would be under  IRS Notice 2020-23 which identifies actions eligible for the extended deadline as any that are described in Revenue Procedure 2018-58.

Just to clarify, this was not intended as a rollover distribution (I needed the cash to pay bills), but it is the general description for returning any premature distribution from an IRA within 60 days tax and penalty free. 

I'm getting the song and dance that they are not tax advisors and I am doing this at my own risk and now they are making me doubt myself. I don't want to make a bad situation worse.

[dmertz]

People posting to other forums recently have mentioned a similar lack of competence in TDAmeritrade reps regarding these IRS notices.  They don't seem to be getting timely training which is making things unnecessarily difficult.

A rollover of a February distribution under Notice 2020-23 doesn't have to be back to the distributing account, but still need to be completed by July 15.  Since this wasn't an RMD, repayment under Notice 2020-51 is not an option.  Otherwise, you would need to qualify as an individual eligible to receive a Coronavirus-Related Distribution to be able to take advantage of the provisions in the CARES Act.  It doesn't matter that the distribution occurred before you incurred the qualifying effects of the pandemic; if the individual qualifies, any distribution made between January 1, 2020 and December 30, 2020 (up to a limit of $100,000 in total CRDs to the individual) can be treated as a CRD.

[fanfare]

If your bank is linked to your TD IRA account, under contributions, select "60-day rollover"

If not linked, you can go to your bank and wire the funds to TD.

It takes a day or two to link up a bank account, so you could be out of time for that.

It might work.

[FuskieBP]

That's just it, dmertz, I don't qualify under the CARES act because I did not need the money for corona relief. I started a job at the start of March and have been financially solvent since then, even as the rest of the country was suffering. Kind of feel guilty about that, but grateful. It's not a RMD but a regular premature distribution taken because at the time, I did not have the cash to pay the bills and had no other sources to tap.  Since it is not coronavirus related, the CARES act doesn't apply.

The question is whether under the provisions under Emergency Declaration I am able to extend the 60 day window under which I would normally be able to return a premature distribution to July 15th.  If I read Notice 2020-23, even though the original intention was not to roll the distribution over to another Traditional IRA account, if I return it to the original Traditional IRA or to an alternate Traditional IRA by July 15th, it will be considered a rollover distribution and I can avoid taxes and penalties on the amount.

That's what I need to confirm.

[dmertz]

You are correct.  If you have not suffered financially from the pandemic, you do not qualify for a CRD unless you are actually diagnosed with the infection.  If you don't qualify, you cannot treat your February distribution as a CRD.  Since the distribution is not a RMD, your only option to do a rollover is to complete the rollover by July 15, 2020.

Notice 2020-23 permits the rollover-deadline extension by reference to IRS Revenue Procedure 2018-58 (https://www.irs.gov/pub/irs-drop/rp-18-58.pdf) which explicitly lists time-sensitive acts for which the deadline has been extended (postponed).  Included in that list is #23 of Section 8, the deadline for rolling over an IRA distribution.

[FuskieBP]

So I have Traditional IRAs with 2 different brokerages. Would I be in safer territory if I deposited the amount I took as distribution back in February to the other Traditional IRA, so that it was in fact a rollover contribution?  Would I be risking IRS attention by returning the amount to the same Traditional IRA? The distribution wasn't originally intended as a rollover, but by effectively moving the money from one Traditional IRA to another within the extended time frame allowed, it would in effect become a rollover.

[fanfare]

no you can't effectively make it a Rollover that way.

You still have to meet the criteria.

It doesn't matter if the money goes back to the same custodian or a different custodian.

[dmertz]

It makes no difference which of your traditional IRAs you choose to receive the rollover and long as the one that you choose can process the deposit in time for you to meet the July 15, 2020 rollover deadline.  It doesn't matter to the IRS at all which one you choose.

[FuskieBP]

no you can't effectively make it a Rollover that way.

You still have to meet the criteria.

What additional criteria, other than coming from and going from one Traditional IRA to another Traditional IRA? Did I have to declare it was a rollover initially? Do I need to do anything more than return it to a Traditional IRA before July 15th?