IRS Enables Millions to Qualify for the $100,000 IRA Grab and Repay

New IRS guidance expands the possibilities for what is an
adverse COVID-19 impact on you for purposes of taking up to $100,000 out of
your retirement accounts and repaying it without penalties.

First, let’s look at the rules as they existed before this
new IRS guidance. The CARES Act created the first set of favorable rules, and
those rules are still in play.

What the CARES Act Says

A coronavirus-related distribution from your qualified
retirement plan, Section 403(b) plan, or IRA gets two tax benefits:

1. If you withdraw and keep the money, you pay no 10 percent
   early withdrawal penalty and you can spread the income equally over tax
   years 2020, 2021, and 2022. You also can elect to include it all in tax
   year 2020, if you want.
2. You can repay the money within three years of the
   distribution date and pay no tax or penalty on the amount.

Under the CARES Act relief, you qualify for a
coronavirus-related distribution if

• you, your spouse, or your dependent is diagnosed with
  COVID-19 with a CDC-approved test;
• you experience adverse financial consequences as a result
  of being quarantined, being furloughed or laid off, or having work hours
  reduced due to COVID-19;
• you experience adverse financial consequences as a result
  of being unable to work due to lack of childcare due to COVID-19; or
• you experience adverse financial consequences as a result
  of closing or reducing your business hours due to COVID-19.

And then there are two additional CARES Act rules for
coronavirus-related distributions:

1. You can’t treat more than $100,000 per person as a
   coronavirus-related distribution, and
2. You must take the distribution on or after January 1, 2020,
   and before December 31, 2020.

IRS Expands Relief

With the new IRS relief, you now also qualify for
coronavirus-related distributions if you experience adverse financial
consequences because

• you, your spouse, or a member of your household has a
  reduction in pay or self-employment income due to COVID-19;
• you, your spouse, or a member of your household has a job
  offer rescinded or start date for a job delayed due to COVID-19;
• your spouse or a member of your household is quarantined, is
  furloughed or laid off, or has work hours reduced, due to COVID-19;
• your spouse or a member of your household is unable to
  work due to lack of childcare due to COVID-19; or
• your spouse or a member of your household owns or operates
  a business that closed or reduced hours due to COVID-19.

Household

For purposes of applying the additional factors, a member of
the individual’s household is someone who shares the individual’s principal
residence.

Merriam-Webster defines a household as

• those who dwell under the same roof and compose a family,
  and
• a social unit composed of those living together in the
  same dwelling.

You have to think roommates living together create a
household, and if one of them is affected by COVID-19—say, lost his or her job
and stopped contributing to the rent—the remaining roommates were adversely
affected and should be entitled to the IRA grab and repay strategy.

Your Repayment Options

You have many repayment options, as we explain below. To
make this easy, let’s say you grab $30,000 from your IRA today and you want to
know how you can repay the $30,000 with no taxes or penalties. Here are five
scenarios:

Scenario 1. You repay the $30,000 before you timely
file your 2020 tax return:

• You don’t include any of the $30,000 in income on your
  2020 tax return. You pay no taxes or penalties.

Scenario 2. You elect to include all $30,000 as
income on your timely filed 2020 tax return, but then repay the full $30,000
sometime between filing the 2020 return and July 15, 2023:

• You amend your 2020 tax return to remove the $30,000 from
  income and claim a refund of tax paid on that amount.

Scenario 3. You include $10,000 as income on your
timely filed 2020 tax return, but then repay the full $30,000 sometime between
filing the 2020 return and July 15, 2023:

• You claim $10,000 of income on your original 2020 tax
  return, and
• You later amend your 2020 tax return to remove the $10,000
  from income and claim a refund of tax paid on that amount.

Scenario 4. You include $10,000 as income on your
timely filed 2020 tax return, but then decide to repay $10,000 of the total
$30,000 distribution, which you do on March 1, 2022:

• You claim $10,000 of income on your 2020 tax return,
• You claim no income on your 2021 tax return (because you
  made the $10,000 repayment prior to filing the return), and
• You claim $10,000 of income on your 2022 tax return.

Scenario 5. You include $10,000 as income on your
timely filed 2020 tax return, but then decide to repay $20,000 of the total
$30,000 distribution, which you do on November 1, 2021. This one is tricky
because you have two ways to do it:

• You claim no income from the distribution on either your
  2021 or 2022 tax return, or
• You claim $10,000 of income on your 2022 tax return and
  amend your 2020 tax return to remove the $10,000 from income and claim a
  refund of tax paid on that amount.

As you can see, you have many options when it comes to
taking up to $100,000 from your retirement plan. If you would like to discuss
your options with me, please call me on my direct line at 408-778-9651.