By Daisy Maxey
June 30, 2020
The coronavirus-relief act offers many Americans a financial lifeline or a chance to better manage retirement savings, but navigating the new rules can be daunting. The Internal Revenue Service recently offered guidance on some of the provisions of the Cares Act, such as clarifying who can take coronavirus-related distributions from qualified retirement-savings plans and expanding the ability to repay required minimum distributions already taken this year. Still, Barron’s readers continue to have questions on tapping retirement-plan savings and recapturing distributions. Here are some answers:
Still, Barron's readers continue to have questions on tapping retirement-plan savings and recapturing distributions. Here are some answers:
May I return required minimum distributions if they were taken this year from more than one individual retirement account? Also, may I return RMDs taken this year that were remitted directly to the IRS?
Recent guidance from the IRS says that anyone who took an RMD from an IRA or 401(k) plan in 2020 can repay the withdrawn funds, but they must do so by Aug. 31.
"Normally, you are only allowed to do one rollover every 12 months, but these RMD returns are not limited by this once-a-year rule," says Lawrence Pon, a certified public accountant in Redwood City, Calif.
If funds from the RMD were remitted directly to the IRS for federal tax withholding, they can't be recaptured now and repaid to the retirement plan, says Scholl. However, you will receive credit for the withheld taxes on your 2020 tax return whether you pay the RMD or not, he says.
You could effectively recoup those funds earlier by reducing the withholding on your retirement or paychecks or by reducing your estimated tax payments, says Bret Scholl, a certified public accountant in Corral De Tierra, Calif.
Keep in mind, however, that the entire amount of the RMD must be repaid to your plan in order to avoid being taxed on the distribution, not just the amount that was net of taxes. So, if you had an RMD of $50,000, and $10,000 was withheld for taxes so that you received $40,000, for example, you must repay the entire $50,000 to your plan in order to avoid taxes completely.
My employer hasn't implemented the Cares Act 401(k) provisions, but my hours have been cut. I just bought a house, and I'm taking money out of my savings account to pay bills. Do I have any options to pursue a loan?
If you can certify that you qualify, IRS guidance allows you to take a distribution from a defined-contribution plan without suffering a penalty even if the employer is not implementing the Cares Act relief, says Mary Kay Foss, a certified public accountant in Walnut Creek, Calif.
Those who qualify for the favorable treatment include those who have suffered adverse financial consequences as a result of being quarantined, furloughed or laid off, or having their work hours reduced due to the virus, among others.
The funds will be taxable, but you won't pay the 10% penalty usually required of those under 59½. The distribution would be added to your gross income one-third per year for 2020, 2021, and 2022, or you could elect to pay all of the taxes in 2020, she says.
The Cares Act gives you three years to repay the distribution to a retirement account, "when presumably times will be better," says Foss. If you replace it within the period, you can file amended returns to recoup the taxes paid.
Your employer may report the distribution as an early distribution or a hardship distribution if they are not implementing the coronavirus-related distribution provisions under the Cares Act, Foss says. Despite the employer treatment, you can report it as a qualifying distribution on your 2020 tax form, she says. The limit for such distributions is $100,000.
There is another alternative: Under the Cares Act, those experiencing financial hardship may request "forbearance", or a pause of payments, for a loan backed by the federal governmentâloans backed by Freddie Mae, Freddie Mac, or other entities, says Scholl. The employee homeowner can find out if their loan qualifies by calling their lender, and the process is easy, he says.
My husband took a $50,000 401(k) loan in July 2019 to help buy our house. He was laid off last week. To avoid income taxes and a withdrawal penalty, you usually have until the tax-year filing deadline to replace the amount borrowed—until April 15, 2021, for someone laid off in June 2020. Will this loan fall under the three-year repayment exception?
The loan is not subject to the three-year repayment option set out in the Cares Act because it was taken before the pandemic. The Cares Act specifies that the three-year option is available only to employees who have been affected by the pandemic, says Scholl.
However, also under the Cares Act, qualifying individuals who have an outstanding loan due between March 27 and the end of this year—which would be the case for an employee who was laid off in June—can delay repayment for up to a year, Scholl says.
"The best course really is to chat with your tax professional and check with your plan administrator because there is sometimes flexibility with a plan as to when a loan has to be paid," he says.
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