Julie Jason: A helpful assistant at tax time.
If you are looking at a heap of paperwork that represents your tax information and possible questions related to it, know this: The IRS has numerous tools that can be useful when it comes to tax time. This year in particular, you may need some guidance on special rules that apply to 2020 IRA withdrawals and rollovers.
One of these tools is the Interactive Tax Assistant (tinyurl.com/128ig935). The website describes the ITA as “a tool that provides answers to several tax law questions specific to your individual circumstances.”
There are more than 50 topics listed on the ITA website. Let’s turn to special Coronavirus Aid, Relief, and Economic Security (CARES) Act provisions that affected withdrawals from IRAs.
Under the heading “Retirement: Pensions, IRAs, Social Security” is the topic “Do I Need to Report the Transfer or Rollover of an
IRA or Retirement Plan on My Tax Return?” By clicking on it, you’ll find a list of information you will need to have handy, including what type of retirement plan the distribution came from and went to (and how long between the transfer if it wasn’t moved directly), and whether there is a cost basis to recover.
Once you have that gathered, you can click the blue “Begin” tab.
If you are wondering if you’ll have to pay taxes on the RMD that you rolled over by Aug. 31, 2020, the ITA will take you through the following questions and provide a conclusion based on your answers. But, be alert to the ITA disclaimer:
“This does not constitute written advice in response to a specific written request of the taxpayer within the meaning of section 6404(f ) of the Internal Revenue Code.” Bottom line: You’ll have to review your results with your accountant before taking any action.
Back to the ITA’s questions:
1 What tax year are you asking about? Select 2020.
1 Was the transfer made or distribution received from the retirement account on or before Dec. 31, 2020? Yes.
1 What type of retirement account did the distribution come from? There are a number of choices. For this example, I’ll select “Traditional or SEP IRA.”
1 What type of retirement account was the distribution moved to? Again, I’ll select “Traditional or SEP IRA.”
1 Are you asking about the rollover of a required minimum distribution taken in 2020? Yes. 1 Was the amount of the required minimum distribution rolled over on or before Aug. 31, 2020? Yes.
At that point, the answer appears: “Distributions of amounts up to and including your required minimum distribution taken in 2020 are eligible to be rolled over under the CARES Act.”
Simple enough, but the next part may be confusing: “The repayment will be treated as a rollover but will not be treated as a rollover for purposes of the one rollover per 12-month period limitation or the restriction on rollovers for nonspousal beneficiaries.” This language confirms that for this special 2020 RMD rollover, you don’t have to worry about the 12-month restriction that normally applies to IRA rollovers.
What if your issue was not with an RMD, but instead a coronavirus-related distribution from your IRA? If not for the CARES Act, a withdrawal (distribution) would have been taxable. For more on this type of distribution, see tinyurl.com/y6nvp7zm.
Again using the ITA and the same topic, you’ll find that the first four questions from above are the same.
When asked whether the rollover in question was an RMD in 2020, I answered “no.” That brought up the following questions:
Are you asking about the repayment of a qualified coronavirus-related distribution? Since I wanted to see how a coronavirus distribution was handled by the program, I answered “yes.”
Was the distribution from an inherited retirement account? No.
Then the answer: “Qualified coronavirus-related distributions that are repaid are treated as a trustee-totrustee transfer and are not included in income.” The language confirms that for this special 2020 coronavirus rollover, you don’t have to worry about the 12-month restriction that normally applies to IRA rollovers. That is, the rollover is not taxable.
As mentioned before, you should check with your accountant before taking any actions because you want advice that is directly related to your personal tax situation.
Julie Jason, JD, LLM, a personal money manager (Jackson, Grant of Stamford) and author, welcomes your questions/comments (readers@juliejason.com). Her awards include the 2020 Clarion Award, symbolizing excellence in clear, concise communications. Her latest book, a curated collection of Julie’s columns, is “Retire Securely: Insights on Money Management From an Award-Winning Financial Columnist.” To hear Julie speak, visit juliejason.com/events.