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CARES Act IRA questions, answered


Robert Powell, Special to USA TODAY
Published 3:43 p.m. ET April 15, 2020

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The CARES Act, the legislation signed into law by President Trump in March, generated many questions from readers. Below we answer some of them.

Q: You wrote in a recent article that “the law also doubles the amount 401(k) participants can take in loans from an account for the next six months to the lower of $100,000 or 100% of the account balance. IRAs don’t permit loans.”

It seems as if this part of Bill S.3548, speaks to individual retirement account (IRA) loans:

(C) TREATMENT OF REPAYMENTS OF DISTRIBUTIONS FROM IRAS.—For purposes of the Internal Revenue Code of 1986, if a contribution is made pursuant to subparagraph (A) with respect to a coronavirus-related distribution from an individual retirement plan (as defined by section 7701(a)(37) of such Code), then, to the extent of the amount of the contribution, the coronavirus-related distribution shall be treated as a distribution described in section 408(d)(3) of such Code and as having been transferred to the eligible retirement plan in a direct trustee to trustee transfer within 60 days of the distribution.

Am I interpreting that correctly, that it essentially allows for a coronavirus-related distribution, and essentially a loan, from an IRA?

A: Loans are not permitted from IRAs, says Denise Appleby, the CEO of Appleby Retirement Consulting. The language you cite, she says, refers to a distribution that can be rolled over within 60-days of receipt – extended to three years for coronavirus-related distributions.

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These distributions are not, says Appleby, subject to the terms that apply to loans, such as: level amortized repayments, an interest rate that should be reasonable, a loan agreement, approval by the plan administrator, subject to availably under the terms of the plan

“Therefore, while the IRA distribution can be returned to the IRA or other eligible retirement plan – if eligible as a rollover contribution, it is merely a distribution and not a loan,” says Appleby.

Q: The CARES Act forgives the need to take a required minimum distribution from an IRA for 2020 but neglected to account for those that already took funds out in the first three months of 2020. What should happen in these cases? The simplest solution would be for the IRS to allow people to put back any money that was withdrawn during the first three months of 2020, before the CARES Act was passed. Most IRAs do have a 60-day window to return withdrawn funds but inherited IRAs do not have any window to return funds. What do you think?

A: If it is within 60 days from the date of the distribution of the RMD the funds can be rolled over as long as they are otherwise eligible for rollover, says Sarah Brenner, an IRA analyst with Ed Slott and Company. “That would mean no violations of the once-per-year rollover rule and non-spouse beneficiaries could not roll over an RMD from an inherited IRA,” she says.

According to Brenner, many IRA owners are having issues with the once-per year rollover rule as they have taken RMDs from multiple IRAs. “The once -per-year rule would mean only one of these distributions could be rolled over,” she says. “A possible strategy for an IRA owner in this situation who does not want or need the funds is to convert the other distributions that were taken to Roth IRAs. The once-per-year rule does not apply to Roth conversions.”

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To be sure, the IRS may step in and grant some sort of relief as they did in the past when RMDs were waived back in 2009, says Brenner. “Back then, they granted relief for those who missed the 60-day deadline,” she says. “However, they did not grant relief for the once-per-year rule or allow non-spouse beneficiaries to roll over RMDs.”

Robert Powell is the editor of TheStreet’s Retirement Daily www.retirement.thestreet.com and contributes regularly to USA TODAY. Got questions about money? Email Bob at rpowell@allthingsretirement.com.

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