Do you have an IRA or other retirement account?

Are you struggling financially because of COVID19? Would IRA borrowing help you out?

Did you know that recent laws passed by Congress allows you to take money out of your IRA and other retirement accounts, avoid early withdrawal penalties, and have generous options on repayment (or not)?

If you’ve been adversely affected by COVID-19, then this is for you!

Distributions from IRAs

If you are an IRA owner who has been adversely affected by the COVID19 pandemic, you are probably eligible to take tax-favored distributions from your IRA(s).

These distributions can add up to as much as $100,000. Eligible individuals can essentially do an IRA borrow and repay the amounts back into an IRA within three years of the withdrawal date.

Would you find this helpful to pay some basic bills?

In addition, the IRA borrower can treat the withdrawals and later re-contributions as federal-income-tax-free IRA rollover transactions.

What?!?!

In effect, the IRA borrowing privilege allows the taxpayer to borrow up to $100,000 from an IRA(s) and re-contribute the amount(s) at any time up to three years later with no federal income tax consequences.

There are no income limits for the IRA borrowing privilege, and there are no restrictions on how you can use IRA borrowed money during the three-year re-contribution period.

If you’re cash-strapped because of COVID19, use this solution to pay bills and add it back later when your financial situation has improved.

If you’re not cash-strapped right now, then I advise you to convert traditional IRAs to a Roth IRA.

IRA Borrowing Basics

Eligible individuals can take one or more distributions that add up to the $100,000 limit. These can come from one or several IRAs. The three-year re-contribution period for each IRA borrowing begins the day after you receive it.

You can make replenish the money in one lump sum or make multiple contributions. You can also re-contribute to one or several IRAs, and they don’t have to be the same account(s) you took the distribution from in the first place.

I don’t advise using this lightly. However, if you’re struggling financially during this time, this could truly be a big relief for you right now.

Remember you have to re-contribute the money within the three-year window for the transactions to be treated as tax-free IRA rollovers. If you’re under age 59 1/2, the dreaded 10 percent penalty tax that usually applies to early IRA withdrawals does not apply to these distributions.

That’s right. There’s no early withdrawal penalty of 10%!

That’s an added bonus for sure.

Again, use this wisely so you don’t lose the tax-free treatment.

Do You Qualify for this privilege?

That’s a great question.

Some IRA owners will clearly qualify, while others may have to wait for IRS guidance. For now, here’s what the CARES Act says.

A COVID19-related distribution is a distribution of up to $100,000 from an eligible retirement plan, including an IRA, that is made on or after January 2, 2020, and before December 31, 2020, to an individual

• who is diagnosed with COVID19 by a test approved by the Centers for Disease Control and Prevention; or
• whose spouse or dependent (generally a qualifying child or relative who receives more than half of his or her support from you) is diagnosed with COVID19 by such a test; or
• who experiences adverse financial consequences as a result of being quarantined, furloughed, laid off, or forced to reduce work hours due to COVID19; or
• who is unable to work because of a lack of child care due to COVID19 and experiences adverse financial consequences as a result; or
• who owns or operates a business that has closed or had operating hours reduced due to COVID19, and who has experienced adverse financial consequences as a result; or
• who has experienced adverse financial consequences due to other COVID19-related factors to be specified in future IRS guidance

While it’s important to wait for further IRS guidance on this subject. I sure hope that the guidance will be liberally skewed in favor of IRA owners. 

We shall see.

What if you don’t pay back the borrowed IRA funds within the 3-year window?

Unfortunately, you will owe income tax on the distribution amount that you don’t re-contribute within the three-year window. However, you don’t have to worry about the 10% early withdrawal penalty if you are under age 59 1/2.

To reiterate…While you will owe income tax on the amount you withdrew, the 10% penalty will not apply if you are under age 59 1/2.

If you don’t repay, you can choose to spread the taxable amount equally over 3 years, apparently starting with 2020.

Example. Tomorrow you withdraw $60,000 from your IRA, and you don’t pay it back. You also don’t elect out of the three-year spread; you now have $20,000 of taxable income in years 1, 2, and 3.

IRA Borrowing Trickiness

Here’s where it can get tricky because the three-year repayment window won’t close until sometime in 2023. Until then, it won’t be clear that you failed to take advantage of the tax-free IRA borrowing rollover deal.

Because of this, you might need to amend a prior-year tax return to report some additional taxable income from the three-year spread.

This is still a little unclear and not addressed in the CARES Act. The IRS still has to weigh in on this. Of course, the IRS may not be in a big hurry to issue guidance right now because it has three years to mull it over.

You also have the option of simply electing to report the taxable income from the IRA borrowing on your 2020 Form 1040. Remember, you won’t owe the 10 percent early withdrawal penalty tax if you are under age 59 1/2.

Can the one-IRA-rollover-per-year limitation prevent you from taking advantage of the IRA borrowing deal?

Generally speaking. No.

This is because as long as you repay the money within the three-year window, it is deemed to be done via a direct trustee-to-trustee transfer that is exempt from the one-IRA-rollover-per-year rule.

So, no worries there.

Phew.

Can you do an IRA borrow from your company’s retirement plan?

Yes as long as your company allows it. The tax rules are similar to those that apply to all other IRA account borrowing.

That said, employers and the IRS have lots of work to do to figure out the details for IRA borrowed distributions taken from employer-sponsored qualified retirement plans. Make sure you research this as more information is offered. I’ll try my best to update as well.

Retirement Account Required Minimum Distribution Rules Are Suspended for 2020

If you’re retired, this is especially important. So pay attention to these details!

In normal times, after reaching the magic age, you must start taking annual required minimum distributions (RMDs) from traditional IRAs set up in your name (including SEP-IRA and SIMPLE-IRA accounts) and from tax-favored company retirement plan accounts.

The magic age is 70 1/2 if you attained that age before 2020 or 72 if you attain age 70 1/2 after 2019.

And you must pay income tax on the taxable portion of your RMDs.

Ugh!

Thankfully, the CARES Act suspends all RMDs that you would otherwise have to take in 2020.

The suspension applies equally to your initial RMD if you turned 70 1/2 last year and did not take that initial RMD last year (the initial RMD is actually for the calendar year 2019).

Before the CARES Act, the deadline for taking that initial RMD was April 1, 2020. Now, thanks to the CARES Act, you can put off any and all RMDs that you otherwise would have had to take this year.

This is a good thing for many!

For 2021 and beyond, the RMD rules will be applied as if 2020 never happened. In other words, all the RMD deadlines will be pushed back by one year, and any deadlines that otherwise would have applied for 2020 will simply be ignored.

Key Takeaways for IRA Borrowing

1. The IRA borrowing privilege can be a very helpful and very flexible tax-favored financial arrangement for eligible IRA owners.

• You can get needed cash into your hands right now without incurring the early 10% withdrawal penalty
• You can then re-contribute the amount anytime within the three-year window that will close sometime in 2023, depending on the date you take the distribution, to avoid any federal income tax hit.

2. The suspension of RMDs for this year helps your 2020 tax situation because you avoid the tax hit on RMDs that you otherwise would have had to withdraw this year.

I love it when I can bring you good news. If you would like to discuss the COVID19 changes to your IRA, please contact me.

Take care and be safe.