Switching my SEPP to CARES ACT distribution

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quisp65
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Switching my SEPP to CARES ACT distribution

Post by quisp65 » Sat May 23, 2020 3:07 pm

Are they going to be plenty lenient with Cares ACT distributions from an IRA? I quit/retired Feb 6th 2020 as a Nurse and took my first 72t SEPP payment March 23rd from Vanguard totaling about $40K. Since the IRS doesn't know my intent till next year in April during tax filing, could that early withdrawal from my IRA qualify as a CARES ACT withdrawal?

My wife is quitting her prn (as needed) Nursing Job in June and hasn't worked since Feb due to I'm fat, 54, & have mild bronchitis and she doesn't want to bring home something and send me to an early grave since she would be dealing with Covid patients. She could work but chose not to and I quit in Feb.

I only needed $200K total for 5 years but now I believe I can get 100K from my IRA in the Cares ACT withdrawals and I already have another 100K in my Roth that satisfies the 5 year rule. Of course I would do conversions to not lower my Roth total.

Don't want to bust a SEPP plan hastily (I guess I got some time to decide) but if an IRA withdrawal is determined by SELF QUALIFICATION, then I would rather not do the SEPP since that is risky and should be used as a last resort. I didn't have enough in my Roth before to satisfy the 5 year rule but that changes with the CARE ACT.
Plan: 75/25 stock index/cash investments, one-way balance market highs, 3.2% withdrawal rate at 54, can lower expenses easily by 1/3rd

Alan S.
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Location: Prescott, AZ

Re: Switching my SEPP to CARES ACT distribution

Post by Alan S. » Sat May 23, 2020 4:30 pm

quisp65 wrote:
Sat May 23, 2020 3:07 pm
Are they going to be plenty lenient with Cares ACT distributions from an IRA? I quit/retired Feb 6th 2020 as a Nurse and took my first 72t SEPP payment March 23rd from Vanguard totaling about $40K. Since the IRS doesn't know my intent till next year in April during tax filing, could that early withdrawal from my IRA qualify as a CARES ACT withdrawal?

My wife is quitting her prn (as needed) Nursing Job in June and hasn't worked since Feb due to I'm fat, 54, & have mild bronchitis and she doesn't want to bring home something and send me to an early grave since she would be dealing with Covid patients. She could work but chose not to and I quit in Feb.

I only needed $200K total for 5 years but now I believe I can get 100K from my IRA in the Cares ACT withdrawals and I already have another 100K in my Roth that satisfies the 5 year rule. Of course I would do conversions to not lower my Roth total.

Don't want to bust a SEPP plan hastily (I guess I got some time to decide) but if an IRA withdrawal is determined by SELF QUALIFICATION, then I would rather not do the SEPP since that is risky and should be used as a last resort. I didn't have enough in my Roth before to satisfy the 5 year rule but that changes with the CARE ACT.
Following the lead in prior disaster distributions provisions as suggested by the IRS, if you have an active 72t plan, a CRD (corona virus distribution) up to 100,000 additional will NOT bust the 72t plan.

Under the current definition of a CRD, it is doubtful that you qualify since neither of you has tested positive, and your terminations appear to have been voluntary precautionary measures. The CRD definition requires the employer to reduce your hours, furlough you, or lay you off in order to qualify, and then only the spouse that incurs one of these situations qualifies for a CRD, not the other spouse. The only way both spouses qualify is from either of you testing positive. It is widely expected that either Congress or the IRS will broaden this definition, and I suspect that eventually either or both of you might qualify for a CRD. If YOU qualify, you can abort the SEPP and treat the 40k distribution as a CRD, eligible to have the income reported over 3 years, and for to repay all or part of any distribution taken this year for 3 years after the date of distribution.

Note that the IRS is under considerable pressure to issue further CRD guidance that would broaden eligibility. If they do not, keeping taxpayers in limbo for much longer impairs the intent of the CARES Act. But you have time, and your SEPP annual or pro rated calculation can be taken in any pattern before year end, so that provides you will time to determine if you can clearly qualify for a CRD once the IRS releases guidance.

Not sure what you meant with respect to the Roth 5 year rule. The CARES Act has no effect on whether your Roth distributions are qualified or not. However, it does appear that a CRD being re paid can be placed in a Roth IRA as a conversion if desired.

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quisp65
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Re: Switching my SEPP to CARES ACT distribution

Post by quisp65 » Sat May 23, 2020 5:24 pm

Alan S. wrote:
Sat May 23, 2020 4:30 pm
Following the lead in prior disaster distributions provisions as suggested by the IRS, if you have an active 72t plan, a CRD (corona virus distribution) up to 100,000 additional will NOT bust the 72t plan.

Under the current definition of a CRD, it is doubtful that you qualify since neither of you has tested positive, and your terminations appear to have been voluntary precautionary measures. The CRD definition requires the employer to reduce your hours, furlough you, or lay you off in order to qualify, and then only the spouse that incurs one of these situations qualifies for a CRD, not the other spouse. The only way both spouses qualify is from either of you testing positive. It is widely expected that either Congress or the IRS will broaden this definition, and I suspect that eventually either or both of you might qualify for a CRD. If YOU qualify, you can abort the SEPP and treat the 40k distribution as a CRD, eligible to have the income reported over 3 years, and for to repay all or part of any distribution taken this year for 3 years after the date of distribution.

Note that the IRS is under considerable pressure to issue further CRD guidance that would broaden eligibility. If they do not, keeping taxpayers in limbo for much longer impairs the intent of the CARES Act. But you have time, and your SEPP annual or pro rated calculation can be taken in any pattern before year end, so that provides you will time to determine if you can clearly qualify for a CRD once the IRS releases guidance.

Not sure what you meant with respect to the Roth 5 year rule. The CARES Act has no effect on whether your Roth distributions are qualified or not. However, it does appear that a CRD being re paid can be placed in a Roth IRA as a conversion if desired.
Thanks for the info. I'll be watching the IRS for further instruction. I meant to say I contributed enough to a Roth account that I can withdrawal a little over 100K without penalty and that the account is at least 5 years old so it's qualifies age wise.
Plan: 75/25 stock index/cash investments, one-way balance market highs, 3.2% withdrawal rate at 54, can lower expenses easily by 1/3rd

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