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Advice needed - CARES and 72(t)/SEPP withdrawal

Posted: Wed Sep 16, 2020 11:16 am
by MikeD41
Background:

I am currently 50.
Unemployed, let go end of 2018.
I have been diagnosed with Sars-CoV-2 by a test approved by CDC.

Advice needed.

Started a 72T/SEPP in January of this year with monthly distribution.
With the CARES act is it possible to break/cancel the 72T without paying the 10% penalty, since it just started this year.
Would I be able to payback the money in line with the CARES act?
Is there anything that is sent to the IRS other then a 1099R? Would it be coded differently for cares instead of a code 1 or 2?

Cheers!

Re: Advice needed - CARES and 72(t)/SEPP withdrawal

Posted: Wed Sep 16, 2020 12:03 pm
by michaeljc70
There is really no way to cancel a 72t without penalty that I know of other than dying, taking 5 years of distributions or turn 59.5 (whichever is later) or depleting the IRA. You can change your method of calculating the payments one time. Depending what method you chose, maybe another method can reduce your withdrawal somewhat.

I don't know if you are married with a working spouse, but if so, you can possibly put some of the money back into the IRA annually.

Re: Advice needed - CARES and 72(t)/SEPP withdrawal

Posted: Wed Sep 16, 2020 12:27 pm
by MikeD41
What I am trying to say is if I break the 72T could I take the amount so far as a CARES act distribution and not pay the 10% penalty. Then start the 72T at a later date.

Re: Advice needed - CARES and 72(t)/SEPP withdrawal

Posted: Wed Sep 16, 2020 2:37 pm
by Alan S.
MikeD41 wrote: Wed Sep 16, 2020 12:27 pm What I am trying to say is if I break the 72T could I take the amount so far as a CARES act distribution and not pay the 10% penalty. Then start the 72T at a later date.
The CRD will not affect your SEPP. Per Sec 4 (H) of IRS Notice 2020-50:
H. Coronavirus-related distributions will not be treated as a change in
substantially equal periodic payments
In the case of an individual receiving substantially equal periodic
payments from an eligible retirement plan, the receipt of a coronavirus-related
distribution from that plan will not be treated as a change in substantially equal
payments as described in § 72(t)(4) merely because of the coronavirus-related distribution
In other words, the CRD amount is completely ignored other than you will pay taxes on it if not repaid. Your SEPP continues as originally structured, so you need to take your usual SEPP annual distribution in addition to the CRD. You probably will need to file a 5329 to claim the penalty waiver on the SEPP distribution, but the reporting of the CRD on Form 8915 E will likely eliminate the penalty on the CRD since there is no penalty for CRD distributions.

Of course, if the CRD results in complete liquidation of your SEPP IRA, the plan automatically ends with no penalty, otherwise it continues with no restart involved.

Re: Advice needed - CARES and 72(t)/SEPP withdrawal

Posted: Wed Sep 16, 2020 6:37 pm
by michaeljc70
MikeD41 wrote: Wed Sep 16, 2020 12:27 pm What I am trying to say is if I break the 72T could I take the amount so far as a CARES act distribution and not pay the 10% penalty. Then start the 72T at a later date.
I don't think so. You took your 1st 72t distribution before the CARES act existed.

The IRS says:

Q4. What is a coronavirus-related distribution?
A4. A coronavirus-related distribution is a distribution that is made from an eligible retirement plan to a qualified individual from January 1, 2020, to December 30, 2020, up to an aggregate limit of $100,000 from all plans and IRAs.

https://www.irs.gov/newsroom/coronaviru ... nd-answers

However, how can you say it was coronavirus related when no one had barely heard of it let alone been tested or laid off from it in January (in the US)? I wouldn't do it without consulting a tax pro and even then it is probably murky. You could probably argue it is an eligible retirement plan and you are a qualified individual.....which meets the IRS definition in theory.

Re: Advice needed - CARES and 72(t)/SEPP withdrawal

Posted: Wed Sep 16, 2020 6:49 pm
by quisp65
If you started a SEPP in January 2020 then nothing has been reported yet and you can just start the SEPP later and count what you took out as part of the 100K for the cares act. I started a SEPP in March but switched it over to a Cares Act since I only need a little extra till 59.5. I'm not sure about all the taxes but I know we'll have to fill out a 8915-e when the IRS decides to make one later this year.

Re: Advice needed - CARES and 72(t)/SEPP withdrawal

Posted: Wed Sep 16, 2020 7:07 pm
by michaeljc70
quisp65 wrote: Wed Sep 16, 2020 6:49 pm If you started a SEPP in January 2020 then nothing has been reported yet and you can just start the SEPP later and count what you took out as part of the 100K for the cares act. I started a SEPP in March but switched it over to a Cares Act since I only need a little extra till 59.5. I'm not sure about all the taxes but I know we'll have to fill out a 8915-e when the IRS decides to make one later this year.
When you say you switched it, what do you mean? You mean mentally and you will report it as a CARES distribution on your tax return? AFAIK, you don't designate that with your broker. Mine had no mechanism to do so.

Re: Advice needed - CARES and 72(t)/SEPP withdrawal

Posted: Wed Sep 16, 2020 7:20 pm
by quisp65
michaeljc70 wrote: Wed Sep 16, 2020 7:07 pm
quisp65 wrote: Wed Sep 16, 2020 6:49 pm If you started a SEPP in January 2020 then nothing has been reported yet and you can just start the SEPP later and count what you took out as part of the 100K for the cares act. I started a SEPP in March but switched it over to a Cares Act since I only need a little extra till 59.5. I'm not sure about all the taxes but I know we'll have to fill out a 8915-e when the IRS decides to make one later this year.
When you say you switched it, what do you mean? You mean mentally and you will report it as a CARES distribution on your tax return? AFAIK, you don't designate that with your broker. Mine had no mechanism to do so.
Yea... mentally in my mind. I was managing my own SEPP through my Vanguard IRA but then they expanded the CARES Act to include spouses so I decided to switch. I just pulled more money out to equal 100K.

Re: Advice needed - CARES and 72(t)/SEPP withdrawal

Posted: Wed Sep 16, 2020 7:31 pm
by michaeljc70
quisp65 wrote: Wed Sep 16, 2020 7:20 pm
michaeljc70 wrote: Wed Sep 16, 2020 7:07 pm
quisp65 wrote: Wed Sep 16, 2020 6:49 pm If you started a SEPP in January 2020 then nothing has been reported yet and you can just start the SEPP later and count what you took out as part of the 100K for the cares act. I started a SEPP in March but switched it over to a Cares Act since I only need a little extra till 59.5. I'm not sure about all the taxes but I know we'll have to fill out a 8915-e when the IRS decides to make one later this year.
When you say you switched it, what do you mean? You mean mentally and you will report it as a CARES distribution on your tax return? AFAIK, you don't designate that with your broker. Mine had no mechanism to do so.
Yea... mentally in my mind. I was managing my own SEPP through my Vanguard IRA but then they expanded the CARES Act to include spouses so I decided to switch. I just pulled more money out to equal 100K.
Thanks for the clarification. Maybe the OP can do the same. I was skeptical but maybe the timing doesn't matter.

Re: Advice needed - CARES and 72(t)/SEPP withdrawal

Posted: Wed Sep 16, 2020 8:57 pm
by Alan S.
If your first SEPP distribution was in 2020, and you qualify for a CRD, you have a choice:
1) Maintain the SEPP as calculated and the CRD will not affect it as I documented earlier.
2) Treat the 2020 distributions as all CRD, limited to 100k and do not report the SEPP. Maybe you do not need a SEPP now, and if you do in the future you can start one then.

If you opt for 1) above your potential distributions will be greater since you can tap the CRD up to 100k penalty free plus the calculated SEPP distribution penalty free. You will also have a larger SEPP distribution than if you start another plan later on, since the interest rates fell further after Covid hit, and your IRA balance for a later SEPP will be smaller.

Much of this strategy involves the length of your SEPP and if your opening balance is your entire IRA or if you fractured your IRA balanced by transfer leaving part of your IRA out of your SEPP.

The methodology for CRDs has been adopted from prior disaster distributions back to 2005 (Katrina). Recent CA wildfires were included and much of CA will likely be designated as a disaster area this year. If you are located in such a disaster area, you do not even need to qualify for a CRD, because the disaster distributions will likely have similar rules and will not affect any SEPP plan you have already started.

Re: Advice needed - CARES and 72(t)/SEPP withdrawal

Posted: Thu Sep 17, 2020 12:21 pm
by MikeD41
Thanks for all the responses.

Fido pointed me to this information, in reading I can't quit the 72T without penalty, and I cannot pay it back and start over with the CARES act.

The Notice also clarifies that the removal of the RMD requirement for 2020 does not provide relief for a taxpayer receiving substantially equal periodic payments to escape a premature distribution tax under IRC §72(t):

Q–10. Does § 401(a)(9)(I) apply to payments that are part of a series of substantially equal periodic payments under the “RMD method” (a series of payments described in Notice 89–25 and Rev. Rul. 2002–62 that are designed to satisfy the § 72(t)(2)(A)(iv) exception to the 10-percent additional tax under § 72(t)) so that the cessation of the payments for 2020 would not be considered a modification under § 72(t)(4)?

A–10. No. Section 401(a)(9)(I) does not apply to these payments; accordingly, if they are stopped in 2020 (other than because of death or disability) prior to age 59½ (or prior to 5 years from the date of the first payment), the cessation of the payments is a modification under § 72(t)(4) so that all the payments made under the series are subject to a recapture tax under § 72(t)(4).[19]

https://www.irs.gov/pub/irs-drop/n-20-51.pdf

Cheers