Tapping Retiremenent Account Early in 2020

[ETax847]

Many people tapped 401(k) and IRA balances to access emergency cash amid the Covid pandemic, as allowed under the federal CARES Act.

I know there is no 10% penalty, but is there any feature in ATX that allows you recognize the income over a 3-year period?  

Also, if someone pays it back down the road, on what form do you recoup the taxes previously paid?

[Lion EA]

Form 8915-E and its instructions:

https://www.irs.gov/pub/irs-dft/f8915e--dft.pdf

https://www.irs.gov/pub/irs-dft/i8915e--dft.pdf

[ETax847]

Thanks Lion! I had no clue that form even existed!

[Sara EA]

Just make sure the distribution is Covid-related.  They or a family member essentially had to have had the virus or been quarantined, or had suffered financially due to reduced hours, job loss, lack of child care so they could work, etc.  I have had several calls from clients who heard they could take the money out (penalty and tax-free!) and were just checking.  Of course they were not told it had to be Covid-related.  I had one who works for a huge area employer and said HR told him he could take out $100k and only pay 10% tax.  He did it, even though he had not been impacted by the virus.  After I told him what his tax liability would really be (and scolded him about setting back his future retirement income), he paid it back except for the withholding.  That amount will be taxed and subject to the 10%.  Another wanted to drain his IRA to pay off credit cards and thought he would be exempt from penalty.  At the end of our lengthy back and forth about it, his employer furloughed everyone for one day a week because of reduced business, so finally my client had a reason that qualified.  There's a lot of misinformation out there, so do ask questions about these retirement plan distributions.

[Pacun]

I have not found anyone NOT affected by 1 dollar because of covid. That's all that is required. So, I was going to prepare a W7, for which I charge $60 but DC closed all non-essential businesses in April, I lost that income of Covid-19. I would pre-qualify myself as being affected by covid and get $99K (nice number) from my 401k.  I have until the 10th of April of 2021, 2022, and 2023 to put back $33K each year and I will be OK. 

If you are not affected by COVID, which I doubt, your spouse, dependent or a household member will make you qualify.

 

[joanmcq]

I'm not affected by Covid at all.  Nor my spouse.  Just sayin'.

[Pacun]

I found you!!!!

AND I am happy that you are not paying more for groceries. 

As you can see the wording of the CARES act is very accommodatable. 

[Sara EA]

This from IRS FAQ:

Q3. Am I a qualified individual for purposes of section 2202 of the CARES Act?

A3. You are a qualified individual if –

You are diagnosed with the virus SARS-CoV-2 or with coronavirus disease 2019 (COVID-19) by a test approved by the Centers for Disease Control and Prevention;

Your spouse or dependent is diagnosed with SARS-CoV-2 or with COVID-19 by a test approved by the Centers for Disease Control and Prevention;

You experience adverse financial consequences as a result of being quarantined, being furloughed or laid off, or having work hours reduced due to SARS-CoV-2 or COVID-19;

You experience adverse financial consequences as a result of being unable to work due to lack of child care due to SARS-CoV-2 or COVID-19; or

You experience adverse financial consequences as a result of closing or reducing hours of a business that you own or operate due to SARS-CoV-2 or COVID-19.

So it's not any financial impact.  It's more specific than that.

[Pacun]

Under section 2202 of the CARES Act, the Treasury Department and the IRS may issue guidance that expands the list of factors taken into account to determine whether an individual is a qualified individual as a result of experiencing adverse financial consequences. The Treasury Department and the IRS have received and are reviewing comments from the public requesting that the list of factors be expanded.

[Pacun]

It is interesting that if a distribution up to $100k was taken on January 2, 2020... it can be treated as a corona virus distribution and the tax payer will not pay penalty and it can be repaid back by April 15, 2023.

This is straight from the horse's mouth:

the term ‘‘coronavirus-related
distribution’’ means any distribution from an eligible retirement
plan made—
(i) on or after January 1, 2020, and before
December 31, 2020,
(ii) to an individual—
(I) who is diagnosed with the virus SARS–
CoV–2 or with coronavirus disease 2019 (COVID–
19) by a test approved by the Centers for Disease
Control and Prevention,
(II) whose spouse or dependent (as defined
in section 152 of the Internal Revenue Code of
1986) is diagnosed with such virus or disease by
such a test, or
(III) who experiences adverse financial consequences
as a result of being quarantined, being
furloughed or laid off or having work hours reduced
due to such virus or disease, being unable to work
due to lack of child care due to such virus or
disease, closing or reducing hours of a business
owned or operated by the individual due to such
virus or disease, or other factors as determined
by the Secretary of the Treasury (or the Secretary’s
delegate).
(B) EMPLOYEE CERTIFICATION.—The administrator of
an eligible retirement plan may rely on an employee’s
certification that the employee satisfies the conditions of
subparagraph (A)(ii) in determining whether any distribution
is a coronavirus-related distribution.
(C) ELIGIBLE RETIREMENT PLAN.—The term ‘‘eligible
retirement plan’’ has the meaning given such term by
section 402(c)(8)(B) of the Internal Revenue Code of 1986.
(5) INCOME INCLUSION SPREAD OVER 3-YEAR PERIOD.—
(A) IN GENERAL.—In the case of any coronavirusrelated
distribution, unless the taxpayer elects not to have
this paragraph apply for any taxable year, any amount
required to be included in gross income for such taxable
year shall be so included ratably over the 3-taxable-year
period beginning with such taxable year.
(B) SPECIAL RULE.—For purposes of subparagraph (A),
rules similar to the rules of subparagraph (E) of section
408A(d)(3) of the Internal Revenue Code of 1986 shall
apply.
(6) SPECIAL RULES.—
 

[Possi]

"It is interesting that if a distribution up to $100k was taken on January 2, 2020... it can be treated as a corona virus distribution and the tax payer will not pay penalty and it can be repaid back by April 15, 2023."

So, it's taxable income, but not subject to the penalty if COVID related, but if we take this exemption, MUST they pay it back by April 15, 2023? 

[Possi]

19 minutes ago, Possi said:

"It is interesting that if a distribution up to $100k was taken on January 2, 2020... it can be treated as a corona virus distribution and the tax payer will not pay penalty and it can be repaid back by April 15, 2023."

So, it's taxable income, but not subject to the penalty if COVID related, but if we take this exemption, MUST they pay it back by April 15, 2023? 

Hey, I had a novel idea and READ THE INSTRUCTIONS so kindly posted above. Sorry for the dumb question! 

[BulldogTom]

1 hour ago, Possi said:

Hey, I had a novel idea 

A novel idea is much better than a novel coronavirus!

Tom
Modesto, CA

 

[Christian]

A client I have cashed out a qualified plan to pay off credit card debt. She had operated a small business which she was unable to do because of merchandise supply issues so it looks as if she would not need to pay the 10% penalty. Of course, she being absent minded failed to have withholding set up. Oh well. Another client drawing significant unemployment insurance did the same darn thing. "They were supposed to have taken out federal tax". He never checked to insure they did. I can see not a few long faces this season. 

[Catherine]

5 hours ago, Possi said:

Hey, I had a novel idea and READ THE INSTRUCTIONS so kindly posted above. Sorry for the dumb question! 

Y'know, sometimes the instructions HIDE the information until AFTER you ask.  I think it's to keep us humble, or something.

[Pacun]

3 hours ago, Christian said:

A client I have cashed out a qualified plan to pay off credit card debt. She had operated a small business which she was unable to do because of merchandise supply issues so it looks as if she would not need to pay the 10% penalty. Of course, she being absent minded failed to have withholding set up. Oh well. Another client drawing significant unemployment insurance did the same darn thing. "They were supposed to have taken out federal tax". He never checked to insure they did. I can see not a few long faces this season. 

Remember that the tax break is only for $100K.  That means that if I took out $150K. I have a choice of paying everything in 2020 tax return which will mean that I will pay $5,000 in penalty and taxes on $150K.

If I decide to take the breaks, I will have to pay taxes and penalty on $50K (no break for this portion of the distribution). Then I will have to deal with the other $100K that do get a break. I will elect to pay taxes on the next three years and possible to put back the money so the tax liability dissipates. If I decide to put back $33,667.00 before April 15, 2021, my 2020 filing will reflect only penalty and taxes on the $50K. 

If I don't put back any money after those $33,667.00 mentioned above, but on April 10, 2023, I put back $66,333.00, I will pay no taxes on the distribution on my 2022 return AND I will have to amend my 2021 so I get back the taxes I paid. 

I love to say comprende compadre?  Let me know if I am wrong.  I think I will be the first tax preparer proven wrong but that's OK.

[Pacun]

On the above post.... there are three figures that are wrong but the idea stays. $33,667.00 should be $33,333.00 which is $100K\3. The same number is wrong on the next line and finally $66,333.00 should be $66,667.00. My head some times betrays me and sometimes refuses to use calculator. It is too late for me to change it, but may be an administrator can make the changes and delete this post.

[Possi]

Very clear, thanks. I did split the distribution over 3 years. 

Turns out the whole fam damily had COVID. Easy qualification.

She had 2 other regular 1099Rs, normal code 2 early retirement accounts. 

But, the $60k was code 1. 

Paid tax on 1/3 of the $60k, the rest will follow in the next 2 years. Zero penalty. 

And, I'm a hero. 

Who'da thunk it. 

 

[Randall]

A client just informed me he will not pay it back and wants to pay tax on the whole amount in 2020.  So I don't think I need to wait on Form 8915E.  If I mark the 5329 code 12 so there's no penalty, the regular tax will just calculate as usual.

[Possi]

1 hour ago, Randall said:

A client just informed me he will not pay it back and wants to pay tax on the whole amount in 2020.  So I don't think I need to wait on Form 8915E.  If I mark the 5329 code 12 so there's no penalty, the regular tax will just calculate as usual.

Oh, well... there ya GO! Thanks!

[Pacun]

Randall, 

You have the opportunity of tax planning even if the clients say they want to pay in 2020, you might want to see if they will make more or... less money in the future. Paying $6K now in taxes is not as good as paying $3K or less in a year and another $3K or less in 2 years.

What if your clients put their hands on a quarter of a million dollars within the next two years...... I guess they put the money back and amend returns. 

Also, since you didn't mention the amount, it is not worth it if they only took out a few hundred dollars out.

[Randall]

1 hour ago, Pacun said:

Randall, 

You have the opportunity of tax planning even if the clients say they want to pay in 2020, you might want to see if they will make more or... less money in the future. Paying $6K now in taxes is not as good as paying $3K or less in a year and another $3K or less in 2 years.

What if your clients put their hands on a quarter of a million dollars within the next two years...... I guess they put the money back and amend returns. 

Also, since you didn't mention the amount, it is not worth it if they only took out a few hundred dollars out.

They took the full 100k.  I double checked with him to be sure.  The Fed would probably not change over 3 years (unless like you said, they got a windfall).  The Ky would help them to spread it out.  I will run it by them again.

[RitaB]

Alright.  I sent three returns for clients who didn't want to take advantage of reporting the early distribution over three years.  I used Form 5329 only.  They were accepted.  THEN I happen to read on the ATX Form 5329, under Part I, that we don't use this Form for coronavirus related distribution. 

I noticed just now that the IRS pdf for 2020 Form 5329 does not have that instruction against using the form for coronavirus distribution.

Just throwing this out there.  No idea if we that used 5329 should amend to include 8715-E or not. 

I have three others that I will hold onto and use 8715-E.  And yes, I have tried to dissuade folks from shooting themselves in the foot by not spreading the income over three years.  They have already shot themselves in the foot by taking distributions they didn't need while the market was down.  There's no helping these folks:  "Oh, your hours were cut causing your income to be 4,000 less.  It makes perfect sense to take out 90,000 from your 401k.  Ok."

[Abby Normal]

If the tax is right on the return, regardless of how I got there, I almost never amend the return.

[Randall]

My return with 5329 marked 12 went thru and was accepted.  I think the code is 12, but the input worksheet had 'b' as coronavirus related.