Tax and financial advice from the Silicon Valley expert.

Developments and planning ideas for Roth IRA and Regular IRA accounts

IRS filing deadlines extended for many Californians

The filing deadline for federal individual and business income tax returns (including Form 5500) of certain California taxpayers with a due date on or after January 8, 2023 is extended to May 15, 2023.

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For Seniors Only – IRS allows “undoing” an unneeded 2020 “required” retirement plan distribution

The CARES Act eliminated required minimum distributions for 2020.  (Distributions are still required for a defined benefit account, which is basically an employer-provided retirement annuity.)

As a general rule, you have to start taking distributions from a retirement account, like an IRA or a 401(k), when you reach age 72 (as amended by the SECURE Act.)  The required minimum distribution is computed based on your life expectancy each year.  This rule has been waived by the CARES Act for 2020.

If you don’t need the money for living expenses, it’s best not to  take money out of a retirement account, so that it can continue to enjoy tax-deferred growth.  (If you do need the money for living expenses, this discussion doesn’t apply to you.  There’s no requirement to roll over what would otherwise be a required minimum distribution.)

Without this exception for 2020, distributions that are required minimum distributions wouldn’t be eligible for a rollover to an IRA or other qualified retirement account.

The elimination of required minimum distributions created a problem for some taxpayers.  Taxpayers usually can only roll over one distribution in a 12-month period.  Many retired persons take their distributions in monthly installments to make it easier for them to budget funding their expenditures.

In addition, rollovers usually must be completed within 60 days.  The IRS previously extended the due date to complete a rollover for a distribution made during the period from February 1, 2020 to May 16, 2020 to July 15, 2020 with Notice 2020-23.

Now the IRS has announced more relief for retirement account distributions received during 2020 that would otherwise be required minimum distributions in Notice 2020-51.  Here is a URL for the Notice. https://www.irs.gov/pub/irs-drop/n-20-51.pdf

  1. The due date to complete a rollover of any distribution that would otherwise be a required minimum distribution during 2020 is extended to be not before August 31, 2020.
  2. Any distribution that would otherwise be a required minimum distribution paid during 2020 is not subject to the one rollover per 12-month period limitation.  In other words, if multiple payments have been received that would otherwise be required minimum distributions, the total of all of the payments can be rolled over.
  3. The IRS clarified that a plan participant with a required beginning date of April 1, 2021 (became age 72 during 2020), is not required to take an initial distribution on that date.  Unless there is a later tax law change, the plan participant will still have to receive a required minimum distribution for 2021 during 2021.  Any distributions made during 2021 will first be applied as required minimum distributions and will ineligible for a rollover.
  4. Even though no distribution is required when the required beginning date is April 1, 2020 or April 1, 2021, those dates will still be the required beginning date for every other purpose, such as determining how distributions must be paid after the death of the participant.

IRAs don’t have to be amended in order to receive a rollover contribution of required minimum distributions.  Employer-provided defined contribution retirement plans (like 401(k)s) do have to be amended to accept these rollover contributions.  Notice 2020-51 includes a sample amendment for a defined contributions plan to accept these contributions.

Notice 2020-51 clarifies that payments that are part of a series of substantially equal periodic payments under the “RMD method” (commenced before age 59 1/2) aren’t considered “required minimum distributions” for the 2020 waiver.  If the payments are stopped in 2020 (other than because of death or disability) prior to age 59 1/2 (or prior to 5 years from the date of the first payment), the cessation of the payments is a modification so that ALL of the payments made under the series are subject to an early distribution recapture penalty tax.

If you already received what would normally be required minimum distributions during 2020, consider rolling them over by August 31, 2020.

If you haven’t received what would normally be a required minimum distribution but have one scheduled for later this year, consider notifying the plan administrator to cancel the distribution.

Also consider that Roth conversions aren’t limited to one per year.  Considering the stock market has been soft, 2020 may be a good year to make one or more Roth conversions.

If you have questions about these matters or need help with your tax and financial planning, consult with your tax advisor and financial advisor.  You can also write to me at mgray@taxtrimmers.com.

 

 

 

IRS issue rules for coronavirus-related retirement plan distributions

The CARES Act, enacted on March 27, 2020, includes relief measures relating to retirement account distributions, including waiving the penalties for certain early distributions from retirement accounts, recontributions of distributions, deferring income taxation of distributions, and increasing the limits for plan loans.

The IRS has issued details of how the relief measures will work in Notice 2020-50.  Here’s a URL for the Notice. https://www.irs.gov/pub/irs-drop/n-20-50.pdf

Qualified individual

Here are the requirements for an individual who would otherwise be subject to the early distribution penalty (usually under age 59 1/2) to qualify for the relief:

  • Diagnosed with COVID-19 by a test approved by the Centers for Disease Control and Prevention;
  • Spouse or dependent diagnosed with COVID-19; OR
  • Who experiences adverse financial consequences as a result of: (1) the individual being quarantined, being furloughed or laid off, or having work hours reduced due to COVID-19; (2) the individual being unable to work due to lack of childcare due to COVID-19, or (3) closing or reducing hours of a business owned or operated by the individual due to COVID-19.

The IRS also extends relief to an individual who experiences adverse financial consequences as a result of:

  • the individual having a reduction in pay or self-employment income due to COVID-19 or having a job offer rescinded or start date for a job delayed due to COVID-19;
  • the individual’s spouse or a member of the individual’s household (shares the same principal residence) being quarantined, being furloughed or laid off, or having work hours reduced due to COVID-19, being unable to work due to lack of childcare due to COVID-19, or having a job offer rescinded or start date for a job delayed due to COVID-19; or
  • closing or reducing hours of a business owned or operated by the individual’s spouse or a member of the individual’s household due to COVID-19.

Coronavirus-related distribution

A coronavirus-related distribution is any distribution from an eligible retirement plan made on or after January 1, 2020 and before December 31, 2020 to a qualified individual.  An individual can receive a maximum of $100,000 of coronavirus-related distributions.  Any distributions beyond the $100,000 limit won’t qualify for relief.

The distribution can be used for any purpose.

A beneficiary of an inherited retirement account doesn’t qualify for relief, because beneficiaries aren’t subject to the early distribution penalty.

Certification to plan administrator

The Notice includes a sample certification to the plan administrator that a distribution qualifies as a coronavirus-related distribution.  The plan administrator can rely on the certification unless the administrator is aware of facts to the contrary, such as more than $100,000 of distributions have been received by the plan participant.

The certification is for the plan administrator.  The individual isn’t bound by the certification for income tax reporting.

Employer plans must be amended to make a qualifying distribution

Employer plans can only make these distributions if they are permitted by the plan document.  The plan document will probably have to be amended to be able to make them.  For most plans, the plan amendment must be made by the last day of the first plan year beginning on or after January 1, 2022.  For government plans, the plan amendment must be made by the last day of the first plan year beginning on or after January 1, 2024.

Some plans, such as annuity type retirement plans, don’t qualify to make early distributions.  401(k) plans usually can qualify.  See your tax advisor for details.

Information reporting

The payor will report the distribution on Form 1099-R.  The distribution must be reported even if the qualified individual recontributes the coronavirus-rleated distribution to the same eligible retirement account in the same year.  The payor may use either distribution code 2 (early distribution, exception applies) or distribution code 1 (early distribution, no known exception) in box 7 of Form 1099R.

Accepting recontribution of coronavirus-related distributions

Retirement plans aren’t required to accept recontributions of coronavirus-related distributions.  It’s optional.  The plan will have to be amended to accept them.

Income inclusion for coronavirus-related distributions

Individuals may elect to report  coronavirus distributions (1) for the year of distribution or (2) ratably over three years, starting with the year of distribution.  The election can’t be made or changed after the timely filing of the individual’s federal income tax return (including extensions) for the year of distribution.  The individual must treat all of the qualifying distributions for the year using the same method.

Reporting recontributions of coronavirus-related distributions

A qualified individual is permitted at any time in the 3-year period beginning the day after the date of a coronavirus-related distribution to recontribute any portion of the distribution, up to the total amount, to an eligible retirement plan.  The distribution is not considered a rollover contribution, so multiple distributions during 2020 can qualify.

If a qualified individual elects to report all of the income for 2020, the recontribution will reduce the amount of the coronavirus-related distribution included in gross income for 2020.  The recontribution is reported on Form 8915-E.  If the recontribution is made after the due date, including extensions, for filing the income tax return for the year for distribution, the income is reduced on an amended income tax return for 2020, which will include Form 8915-E.

If a qualified individual elects to report the income over three years and the individual recontributes any portion of the coronavirus-related distribution to an eligible retirement plan by the due date including extensions, for a tax year in the three-year period, the amount of the recontribution will first be applied to reduce the taxable amount for that year.  The individual may elect to carryover or carryback any excess amount.

For example, Mary received a $30,000 coronavirus distribution during 2020.  She elected to report the income over three years.  Mary files an extension for her 2021 income tax return, extending the due date to August 15, 2022.  Mary recontributes $15,000 to an eligible retirement plan on August 5, 2022.  Mary’s income from the coronavirus distribution for 2021 is reduced to zero.  Mary may elect to reduce her income from the coronavirus distribution for either 2020 or 2022 by the excess $5,000 ($15,000 – $10,000).  A reduction for 2020 would be reported on an amended income tax return.  The reductions are reported using Form 8915-E.

Special rule for year of death

If an individual dies before the full taxable amount of the coronavirus distribution has been included in gross income, the remainder must be included in gross income for the taxable year that includes the date of the individual’s death.

Plan loans

The CARES Act includes relief for employer retirement plan loans.  (California’s income tax rules don’t conform to this change.)

  • The allowable loans from an employer retirement account is increased from $50,000 to $100,000, and the rule that limits the aggregate amount of loans to 50% of the employee’s vested accrued benefit is increased to 100% of the employee’s vested accrued benefit.  The plan document must be amended to permit this change.
  • If a qualified individual had an outstanding loan from a qualified employer plan on or after March 27, 2020, any repayment for the loan due during the period from March 27, 2020 through December 31, 2020 is delayed for one year.  The term of the loan may be extended by up to one year.  Any subsequent repayments are adjusted to reflect the delay and the period of delay is disregarded in determining the 5-year period and term of the loan.  Unpaid interest is added to the loan.  This rule isn’t mandatory.  The employer is permitted to choose to allow this delay in loan payments.

The administrator of a qualified employer plan may rely on an individual’s certification that the individual satisfies the conditions as a qualified individual.

Nonqualified deferred compensation plans

The IRS stated that the coronavirus crisis qualifies as an unforeseen emergency, qualifying for a cancellation of a service-provider’s deferral election relating to a nonqualified deferred compensation plan.  The deferral election must be cancelled, not merely postponed or otherwise delayed.

See your tax advisor

There are many special tax rules that have been enacted for 2020.  This is one year that you can really benefit from meeting with a tax advisor for tax planning.

IRS explains some CARES Act retirement plan provisions

The IRS has posted Frequently Asked Questions relating to CARES Act Retirement Plan Provisions.

According to Q & A 7, a taxpayer who elects to repay a COVID-19 related distribution would pay the tax on the three-year schedule and then amend the tax returns and request refunds when the distribution is repaid.

According to Q & A 9, employers may optionally amend their retirement plans to permit loans and distributions permitted under the CARES Act, so some employers might not allow the increased loans and distributions.

Here is a URL for the FAQs.  https://www.irs.gov/newsroom/coronavirus-related-relief-for-retirement-plans-and-iras-questions-and-answers

Joint Committee on Taxation explains Tax Provisions in CARES Act

The Joint Committee on Taxation has issued a description of the tax provisions in the CARES Act.

Here is a URL to download the report.  https://www.jct.gov/publications.html?func=startdown&id=5256

Due date to complete some IRA rollovers is extended

Notice 2020-23 includes an extension to July 15, 2020 of a host of administrative acts.

“The Secretary of the Treasury has also determined that any person performing a time-sensitive action listed in either § 301.7508A-1(c)(1)(iv)-(vi) of the Procedure and Administrative Regulations or Revenue Procedure 2018-58, 2018-50 IRB 990 (December 10, 2018) which is due to be performed on or after April 1, 2020 and before July 15, 2020 (Specified Time-Sensitive Action), is an Affected Taxpayer.”

Two of the specified acts include:

(1) An eligible rollover distribution that may be rolled over to an eligible retirement plan, including an IRA no later than the 60th day following the day the distribute received the distributed property (Rev. Proc. 2018-58, Section 8, item 23), and

(2) An individual with excess deferrals for a taxable year must notify a plan not later than March 1 following the taxable year that excess deferrals have been contributed to the plan for the taxable year.  A distribution of excess deferrals identified by the individual, plus income attributable to the excess through the end of the taxable year, must be made no later than the first taxable year of the excess (Rev. Proc. 2018-58, Section 8, item 25.)

Therefore, rollovers of IRA distributions made after January 31, 2020 to May 16, 2020 may be completed by July 15, 2020.  (Watch for more IRS announcements relating to retirement plan distributions.)  (Remember distributions from inherited IRAs that have a nonspouse beneficiary aren’t eligible for rollovers.)

Excess deferrals for 2019 contributed to a qualified retirement plan or IRA should be distributed by the plan by July 15, 2020.

Here is a URL for Notice 2020-23.  https://www.irs.gov/pub/irs-drop/n-20-23.pdf

Here is a URL for Revenue Procedure 2018-58.  https://www.irs.gov/pub/irs-drop/rp-18-58.pdf

Here is a URL for Regulations § 301.7508-1. https://www.govinfo.gov/content/pkg/CFR-2012-title26-vol18/pdf/CFR-2012-title26-vol18-sec301-7508A-1.pdf

Tax and financial advice from the Silicon Valley expert.