Changes to Retirement Distribution Rules Summarized

By Jordan Sheppherd

Life Settlements in a Retirement Account? Think Again.

A number of changes have been made to the tax code to provide relief to taxpayers, and some of those changes involve retirement plans. As you all probably know, the CARES Act was passed recently. I thought I would summarize the changes that Act brought about, and what it means for you.

I’ve broken the changes into two categories, IRA LLCs and Solo 401(k)s. Just scroll down to the structure you have, and read on:

IRA LLCs

For those of you who have an IRA LLC, below is a summary of changes that apply to you.

  1. IRA owners that have been affected by the coronavirus situation are now eligible to withdraw or distribute up to $100,000 from their IRA, without triggering the early withdrawal penalty. (Note that this is $100,000 per taxpayer, not per retirement account.) The distribution would still be taxable (unless you have a Roth IRA), but if you’re under 59 1/2 , the 10% early withdrawal penalty wouldn’t apply.
  2. Any emergency distributions taken from an IRA are subject to a three-year reporting and payment rule. The CARES Act allows the taxpayer to spread the income from the distribution over a three-year period. In year one you would report and pay tax on 1/3 of the distribution’s value, year two you would report and pay on another 1/3, and again for the third year.
  3. Emergency distributions can be returned to the IRA or other retirement plan within the three-year reporting period. In other words, the 60-day rollover rule was just extended to three years, for eligible distributions.
  4. Required Minimum Distributions for 2020 can be skipped at the IRA owner’s discretion. So, if you were required to take an RMD from your IRA(s) for tax year 2020, the CARE Act gives you the option of skipping the RMD for 2020.
  5. The IRA contribution deadline, originally April 15th, has been extended to July 15, 2020.

Solo 401(k)s

For those of you using the Solo 401(k) structure, below is a summary of changes that apply to you:

  1. 401(k) participants that have been affected by the coronavirus situation are now eligible to withdraw or distribute up to $100,000 from their 401(k), without triggering the early withdrawal penalty. (Note that this is $100,000 per taxpayer, not per retirement account.) The distribution would still be taxable (unless you have a Roth 401k), but if you’re under 59 1/2 , the 10% early withdrawal penalty wouldn’t apply.
  2. The 20% withholding on 401(k) early distributions has been waived. Withholdings are not required for qualified distributions.
  3. Any emergency distributions taken from a 401(k) are subject to a three-year reporting and payment rule. The CARES Act allows the taxpayer to spread the income from the distribution over a three-year period. In year one you would report and pay tax on 1/3 of the distribution’s value, year two you would report and pay on another 1/3, and again for the third year.
  4. Emergency distributions can be returned to the 401(k) or other retirement plan within the three-year reporting period. In other words, the 60-day rollover rule was just extended to three years, for eligible distributions.
  5. Required Minimum Distributions for 2020 can be skipped at the 401(k) owner’s discretion. So, if you were required to take an RMD from your 401(k) plan for tax year 2020, the CARE Act gives you the option of skipping the RMD for 2020.
  6. The 401(k) contribution deadline, originally April 15th, has been extended to July 15, 2020.
  7. The 401(k) loan limits have been doubled. A 401(k) participant may now borrow up to 100% of their vested account balance, up to $100,000. The loan must be made from the 401(k) plan between the six-month period of March 27, 2020 to September 23, 2020. The CARES Act also allows the participant to forego payments on the loan, for the entirety of 2020; the payments would begin January 1, 2021. The interest rate rules and term rules for a Solo 401(k) remain the same.
  8. If you lose your job after taking a loan from your 401(k), you are allowed to extend the payment deadline to the day your tax return is due for that calendar year, including extensions. So if, in 2020, you take a loan from your 401(k) plan, then lose your job, you can pay back the borrowed money by October 15, 2021 without the loan being considered a taxable distribution.

To all of our Solo 401(k) clients – things are in flux right now in terms of amendments and updates to our plan documents. Formal amendments aren’t going to be required for a bit, but as things firm up in terms of IRS guidance, we’ll be sending out amendment updates as needed.

Also for Solo 401(k) clients – we’re working on new distribution forms and loan documents, to show language reflecting some of the new options. I’ll have them uploaded shortly to our online admin forms section of our site, which you can find here: https://www.checkbookira.com/solo-401k-forms/

If you don’t have your password, reply to this email and I will send it to you.

In the meantime, stay safe, spend time with family, and as the famous wartime poster read: Keep Calm and Carry On.

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    5 Comments

    1. bill

      what if I have already taken my rmd

    2. Sudha Hisaria

      please send me the password for 401k forms

    3. Tracy

      Your information is very helpful, and quick. I just saw the news last night from TV. And this morning, your email already has very clear descriptions! Thank you for your work!

    4. Oliver Hall

      Jordan goes the extra mile for clients! He always provides excellent customer service and a valued expert in his field. Thank you.