IRAs and Coronavirus-Related Distributions and Repayments | Wolters Kluwer
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  • IRAs and Coronavirus-Related Distributions and Repayments

    Randy Heidmann Onward

    Randy Heidmann, Sr. Specialized Consultant, Tax Advantaged Accounts, Wolters Kluwer

    Published May 19, 2020



    Overview

    Section 2202 of the Coronavirus Aid, Relief, and Economic Security Act (i.e., the CARES Act) which was enacted on March 27, 2020, includes a provision allowing for coronavirus-related distribution options from certain retirement plans and the potential to repay such distributions. In general, the CARES Act allows special tax treatment on up to $100,000 in aggregate distribution amounts from 401(k) plans, 403(b) plans, and individual retirement accounts (IRAs), considering that such distributions are taken during 2020 through December 30.

    Coronavirus-Related Distribution Eligibility

    An individual eligible to take a coronavirus-related distribution includes:

    • An account owner who has been, or whose spouse or dependents have been, diagnosed with either SARS-CoV-2 or COVID-19 virus by a test approved by the Centers for Disease Control and Prevention (CDC)
    • An account owner that has experienced adverse financial consequences as a result of the above-mentioned viruses including someone who has:
      • Been quarantined, furloughed, laid off, or had work hours reduced
      • Been unable to work due to lack of childcare, or
      • Been affected by the close of a business or by a reduction of business hours that an individual owns or operates

    The Treasury Department and the Internal Revenue Service (IRS) may issue guidance that expands the list of factors that determine whether an individual is eligible to take such distribution as a result of experiencing adverse financial consequences.

    Taxation of Coronavirus-Related Distributions

    The coronvirus-related distribution provision under the CARES Act allows an eligible individual to include the taxable portion of a distribution in his/her income ratably over a three-year period, starting with 2020. However, an eligible individual has the option of including the entire taxable portion of a distribution amount as income on his/her 2020 federal income tax return. Additionally, an eligible individual avoids the 10 percent additional tax (i.e., 10 percent penalty tax) if he/she has not yet attained age 59½.

    Example: Jill, age 52, took a coronavirus-related distribution in the amount of $15,000 from her IRA on May 1, 2020. Rather than including the entire distribution amount on her 2020 federal income tax return she chooses to include $5,000 on her tax return for each of the next three years (i.e., tax years 2020, 2021, and 2022). Jill will report these ratable distribution amounts each year on IRS Form 8915-E which is expected to be available before the end of tax year 2020.

    Example: Dave, age 56, who was not (nor were his spouse or dependents) affected by the coronavirus, took a distribution of $10,000 from his IRA on July 3, 2020. As Dave does not meet the eligibility criteria for his IRA distribution to be considered a coronavirus-related distribution the entire amount would be includable on his federal income tax return for 2020 unless he was eligible and completed a rollover within 60 days after the date of receipt.

    Reporting Coronavirus-Related Distributions

    Though at the time of this writing the IRS had not specifically indicated how an IRA custodian/trustee should report coronavirus-related distributions on IRS Form 1099-R, Distributions from Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs Insurance contracts, etc., Wolters Kluwer believes the IRS will require that they be reported based on the age of the IRA owner (i.e., if taken before age 59½  - Code 1 if from a traditional IRA or Code J if from a Roth IRA).

    Repayment of Coronavirus-Related Distributions

    An IRA owner may repay to an eligible retirement plan all or part of the amounts taken from a retirement plan in 2020 under the coronavirus-related distribution provision, provided it is done within three-years after the date that the distribution was received. As a result, these repayments have the tax effect of a rollover (i.e., the amount repaid avoids federal income tax). Additionally, for repayment purposes, the ‘rollover’ of a coronavirus-related distribution will not be included in the one-per year rollover rule, and because the deadline to complete a repayment is three years after the date the distribution was received, the 60-day rollover rule will not apply.

    Example: Jill, from an earlier example, took a coronavirus-related distribution of $15,000 from her IRA on May 1, 2020 and chose to include the distribution amount in income over a three-year period. Jill also chose to repay the full amount to her IRA in 2022. Jill will file amended federal income tax returns for 2020 and 2021 to claim a refund of the tax attributable to the amount of the distribution that was included in income for those years. Jill will not be required to include any amount in her income for 2022.

    Example: Dave, from an earlier example, took a $10,000 distribution from his IRA in 2020. As Dave does not meet the definition of an individual eligible to take a coronavirus-related distribution he is subject to the one-per year and 60-day rollover rules.

    Reporting the repayment of a coronavirus-related distribution has not yet been clarified by the IRS. Wolters Kluwer will update this article when the reporting requirments are released.

    Conclusion

    It is expected that an IRA owner will need to substantiate to the IRS that he/she is eligible for a coronavirus-related distribution and not the IRA custodian/trustee. The distinction is important because the ratable taxation rules, waiver of the 10 percent penalty tax, and the relaxed repayment rules are quite different than for an IRA owner not qualified to take a coronavirus-related IRA distribution. Look for future articles posted to Insights for any updated information regarding this specific subject matter or matters in general on the SECURE Act or CARES Act.

    For an opportunity to learn more about IRAs and other tax-advantaged accounts, including Health Savings Accounts and Coverdell Education Savings Accounts, consider our on-demand video training offered on a variety of topics. Click here for more information on training opportunities available to you, or you can call us at 1-800-552-9408.



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