As part of the 2020 Tax Update and Review Conference Virtual Conference series, we field questions from our students throughout the presentation. We have highlighted some of the common questions and the answers you might find valuable.
Lesson 5 deals with many changes made by the SECURE Act for all future years and the special provisions of the CARES Act. Lesson includes pensions & annuities, annuity tables (including the new RMD table), lump sum distributions, rollovers, 2020 coronavirus distributions, self-certifying a late rollover, traditional IRA, Roth IRA, backdoor Roth IRA, Roth conversions, qualified Roth contribution plans, early withdrawal exceptions, self-employed retirement plans, form 5500 filing requirements, SEP plans, 401(k) plans, Sec 403(b) tax-sheltered annuities, required minimum distributions (RMDs), 2020 RMD waiver, solo 401(k) plans, Sec 457 government Plans. Sec 408(p) simple plans, qualified charitable distributions (QCD) and health savings accounts.
QUESTION: If a taxpayer waived IRA req min distribution in 2020, will the taxpayer be required to take double the RMD in 2021?
ANSWER: No. Unless there are additional changes, the RMDs will resume in 2021 as normal and no make-up for the 2020 waiver is required.
QUESTION: Are HSA Contributions for a more than 2% S Corp shareholder treated the same as health insurance paid by the corporation?
ANSWER: No, but the contributions to an HSA may be limited if the insurance paid by the corporation is not a high deductible plan. See chapter 4.21 in the seminar text (the Big Book of Taxes) for additional details and qualifications related to an HSA.
QUESTION: If sole proprietor with solo 401k who is over 72, is he/she required to take RMD if still working for same employer, i.e. still self-employed in original RMD year and in subsequent years?
ANSWER: This is an excerpt from the seminar text (Big Book of Taxes)
STILL WORKING RULE TO DELAY RMDS - Generally, taxpayers that are participants is qualified retirement plans are required to start taking required minimum distributions (RMDs) from the plan no later than April 1 of the year after which they reach the mandatory distribution age.
Still Working Exception - However, there is an exception that applies to certain plan participants who are still working. An employee's RBD (required beginning date) for receiving distributions from a qualified plan is April 1 of the year following the later of the calendar year the employee:
- Reaches age 70 1/2 (72 in 2020 or a later year) or
- The calendar year in which they retire from employment with the employer maintaining the plan.
CAUTION: The employer’s plan may require the retirement plan participant to begin RMDs under the normal rules, in which case the taxpayer cannot take advantage of the “still working “exception.
CAUTION: The above rule does not apply to distributions from IRAs (including those established in conjunction with a SEP or SIMPLE IRA plan) and distributions from qualified plans to more-than-5% owners.
QUESTION: IRA contributed to charity – can it be claimed on Sch A?
ANSWER: I am assuming you are referring to a qualified charitable distribution (QCD). A QCD charitable contribution is a direct transfer from and IRA to a charity. The distribution is not taxable and therefore no charitable contribution is allowed. You can see more on QCDs beginning on page 4.17.06 of the seminar text (Big Book of Taxes).
QUESTION: Does the CARES Act and subsequent acts provide an exception from increased Medicare premiums due to increased income in 2019? In other words, can being impacted by COVID be an adequate reason to waive increase? Example RMD waived for 2020 which shows less income?
ANSWER: The Medicare premiums are based upon the taxpayer’s MAGI two years prior. There has been no change to that in any of the COVID legislation. So, the 2021 Medicare premiums will be based upon the 2019 MAGI.
QUESTION: How about excess contribution to a SEP IRA? What is the penalty, if any, and how do you fix the problem?
ANSWER: An employee may avoid the 6% excise tax on excess SEP contributions, and the 10% early distribution tax on the early withdrawal of the excess contributions, by withdrawing excess contributions from his SEP-IRA on or before the due date (including extensions) for filing the employee's income tax return for the tax year for which the contributions were made (Code Sec. 408(d)(4)).
QUESTION: What qualifies for “adverse financial consequences“ for a COVID distribution up to $100K in order to avoid the early distribution penalty and have 3 years to repay?
ANSWER: Being furloughed or laid off or having work hours reduced due to such virus or disease, being unable to work due to lack of child care due to such virus or disease, closing or reducing hours of a business owned or operated by the individual due to such virus or disease, or other factors as may be determined by the Secretary of the Treasury.
However, I have not seen any additional circumstances issued by the Secretary of the Treasury.
QUESTION: At what age can kids under 18 contribute to a Roth IRA?
ANSWER: There is no specific age limit to contribute to a Traditional IRA or a Roth IRA. There is only a need for earned income. In fact, even the prior upper limit of 70.5 was eliminated by SECURE Act for years after 2019.
QUESTION: Could the self-certified rollover letter work for 2020 RMDs where client did not know they did not need to take it and it's past the 60 days ? Excuse being Delayed Info?
ANSWER: I don’t believe so. The self-certification rule actually specifies reasons when you can use it.
(a) an error was committed by the financial institution receiving the contribution or making the distribution to which the contribution relates;
(b) the distribution, having been made in the form of a check, was misplaced and never cashed;
(c) the distribution was deposited into and remained in an account that the taxpayer mistakenly thought was an eligible retirement plan;
(d) the taxpayer’s principal residence was severely damaged;
(e) a member of the taxpayer’s family died;
(f) the taxpayer or a member of the taxpayer’s family was seriously ill;
(g) the taxpayer was incarcerated;
(h) restrictions were imposed by a foreign country;
(i) a postal error occurred;
(j) the distribution was made on account of a levy under § 6331 and the proceeds of the levy have been returned to the taxpayer; or
(k) the party making the distribution to which the rollover relates delayed providing information that the receiving plan or IRA required to complete the rollover despite the taxpayer’s reasonable efforts to obtain the information.
Unfortunately, the COVID relief gave taxpayers until August 31 to complete a rollover.
COVID Relief: The 2020 waiver of RMDs was not announced until the CARES Act was passed on March 27, 2020. Normally an RMD cannot be rolled over, but the CARES Act essentially changed 2020 RMDs into eligible rollover distributions, which can be rolled over within 60 days of being distributed. Some individuals subject to the RMD requirements had already taken their RMD before the CARES Act was enacted and did not have the opportunity to roll the RMD back into their retirement account if the 60-day rollover period had expired. That issue was first alleviated by Notice 2020-23 that said that any 60-dayrollover period that ends on or after April 1, 2020 and before July 15, 2020 was extended through July 15, 2020. The July date was further extended to August 31, 2020 by Notice2020-51. That notice also clarified that an RMD rollover would not be subject to the one IRA rollover per year limitation and allows taxpayers that took RMDs at any time earlier in 2020 to complete a rollover by August 31, 2020.
QUESTION: Do we have any more information as to what qualifies as financial hardship for the coronavirus distribution withdrawal? I have several clients that want to withdraw the money up to 100k and pay off bills or invest in real estate property. They all have had about a 25-50% reduction in pay. And they all make over 100k in family income, even after the income reduction of wages and commission. They are being told that they qualify due to paycheck reduction from their financial advisors. I thought I heard that there are questions in the Big Book that we need to ask, but I was unable to find them. I'm hoping to notify these clients before they pull the money out, if possible. Also, what kind of verification will the IRS require to show that they do qualify? Should we be concerned about preparer penalties? Most of these clients feel that their income has been drastically affected...I'm concerned that it may be a matter of perception.... Thank you.
ANSWER: The CARES Act specified what constituted a qualified taxpayer for purposes of a Coronavirus-related distribution. A qualified taxpayer for this purpose is one (Act Sec 2202(a)(4)(A)):
(I) That is diagnosed with the virus SARS-CoV-2 or with coronavirus disease 2019 (COVID-19) by a test approved by the Centers for Disease Control and Prevention,
(II) Whose spouse or dependent is diagnosed with such virus or disease by such a test, or
(III) Who experiences adverse financial consequences as a result of being quarantined, being furloughed or laid off or having work hours reduced due to such virus or disease, being unable to work due to lack of child care due to such virus or disease, closing or reducing hours of a business owned or operated by the individual due to such virus or disease, or other factors as may be determined by the Secretary of the Treasury.
Have not seen any other factors specified by the Secretary of the Treasury. But (III) may work for your clients. This is covered in chapter 4.05 of the Big Book.
It can be a problem for practitioners where clients do not qualify. There is no special preparer penalty.
QUESTION: Could the 2020 RMD be deposited to a ROTH recognizing the income on the return?
ANSWER: In a normal year, a taxpayer must do the RMD for the year before converting any of the IRA funds to a Roth IRA. However, RMDs are suspended for 2020 so a taxpayer can make a conversion at any time. The conversion is not limited to any specific amount, the taxpayer can convert as much or as little as they like.
QUESTION: Taxpayer is sole proprietor, has 401K for self and employees, with 4% match on employee contributions and year-end profit sharing. Plan discontinued before end of year. Only employee contributions and matches were made, no profit sharing, nothing for the taxpayer himself. Can this taxpayer now contribute to his own IRA and get a tax break?
ANSWER: If individuals wish to maximize their retirement contributions, they may become involved in more than one plan and end up with a combination of plans. Although there are maximum contribution restrictions to qualified plans or combination of qualified plans, a taxpayer can also have an IRA in addition to qualified plans. So yes, your client can also have an IRA.
QUESTION: I have an unusual situation where I converted a private LLC $100,000 IRA investment to ROTH IRA in 2020, then the investment sponsor lost pretty much all of our money and there will be no profit whatsoever. Is there some way to recharacterize the 2020 conversion in this odd set of circumstances? (Wishfully thinking...) Thank you!
ANSWER: Sorry no, TCJA repealed the special rule that allows a traditional IRA to Roth IRA conversions to be later unwound. Thus, for example, under the provision, a conversion contribution to a Roth IRA during a taxable year can no longer be recharacterized as a contribution to a traditional IRA (thereby unwinding the conversion). The provision is effective for taxable years beginning after December 31, 2017. (IRC Sec. 408A(d)(6)(B)(iii) as amended by TCJA Sec. 13611(a).
QUESTION: Has California conformed to the 3-year payback?
ANSWER: Since California automatically conforms to the IRC Sec 72(t) early withdrawal penalty (except at a rate of 2.5% instead of 10%), California will conform to the waiver of the penalty when the distribution qualifies for federal purposes as a coronavirus-related distribution. California will also conform to the option to spread the tax on the distribution over 3 years, or the taxpayer can elect to include all of the income in the 2020 return. A separate California election can be made to report all of the income in 2020. California will follow the federal provision that permits the taxpayer to re-contribute the distribution to the IRA or retirement plan within the 3-year period.
QUESTION: Client makes $132000 gross salary with 401k contribution. Single. Can she still put money in a Roth IRA?
ANSWER: Yes, but subject to the Roth AGI phase outs which are based on filing status. See the Big Book text page 4.06.02 for phaseouts. However, A taxpayer can contribute to a traditional IRA and then convert that traditional IRA to a Roth IRA. This also gives rise to an opportunity to defer income from one year to another by making a deductible IRA contribution in one year and converting it to a Roth IRA in a subsequent year. Options:
- Make a designated non-deductible Traditional IRA contribution and then convert it into a Roth IRA in a subsequent year. The only tax when converted would be on the earnings. Caution: This strategy may not work or work as well if the taxpayer already has other IRA accounts. Remember when a taxpayer has made both deductible and nondeductible IRA contributions all Traditional IRAs are treated as one, and for the taxpayer who has other IRA accounts a conversion will be treated as coming ratably from all of them, which may include taxable conversions.
- Make a deductible Traditional IRA contribution, AGI permitting, and then convert it into a Roth IRA in a subsequent year. This would effectively defer the income from the contribution year to the conversion year.
QUESTION: Can you contribute to an IRA if you are 75 or 78?
ANSWER: For Tax Years after 2019: The SECURE Act, repealed the maximum age for making traditional IRA contributions. Thus to the extent of an individual’s earned income and not exceeding the IRA contribution limit, an individual can make IRA contribution at any age.
QUESTION: Can you take a full IRA Deduction and a SIMPLE Deduction regardless of amount of Income?
ANSWER: Multiple Plan Limitations – If individuals wish to maximize their retirement contributions, they may become involved in more than one plan and end up with a combination of plans. This is where some overall limitations apply and where individuals can unknowingly make excess contributions, resulting in penalties and having to make corrective distributions.
- 401(k)s – It is not uncommon for individuals to have multiple employers, each with a 401(k) plan. This can possibly create a situation in which the employee makes an excess elective deferred compensation contribution. The annual maximum limit applies to all 401(k) contributions combined.
- Combinations of Deferred Income Plans – There is also a $57,000 limit for 2020 on the aggregate amount of all elective deferrals made by an individual during the year. Plans affected by this limit include:
- 401(k) plans,
- SEP plans,
- SIMPLE plans, and
- Tax-sheltered annuities (TSAs, also referred to as 403(b) plans). However, Code Sec. 457 plans (government plans) are not included in the overall deferral limitations
- IRAs – The IRA limits apply to the aggregate contributions to traditional and Roth IRAs. However, an individual can have both an IRA and deferred income plans.
QUESTION: Can a husband and wife take the 100,000 for each?
ANSWER: I’ll assume you are talking about a coronavirus distribution. Yes, but only from their respective retirement accounts. In other words, if for example, one spouse has a retirement and the other does not, then only the one with the retirement plan can take a distribution.
QUESTION: Slide 4.06.01. For clarification, can a Taxpayer who is not required to take his RMD in 2020 withdraw from his Traditional IRA an amount equivalent to what his RMD would have been convert this amount to a Roth IRA?
ANSWER: Under normal circumstance one would have to take the year’s RMD before converting a traditional IRA to a Roth IRA. However, for 2020 RMDs are suspended so one can convert to a Roth without first taking an RMD.
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