Amounts can be re-deposited into traditional IRAs within three years of withdrawal (s). Each withdrawal and subsequent re-contribution within three years is treated as a tax-free IRA rollover. That's the tax break.
The non-tax benefit is that you can use CVD funds however you want. You can use the funds to pay bills and then contribute again within three years if you can afford it. You can help your adult children now and later.
Point. The favorable tax treatment extends to traditional IRAs, SEP-IRAs, SIMPLE-IRAs, and employer-sponsored retirement plans that allow CVDs.
The tax-free-rollover-equivalent outcome requires some unpleasant interim tax consequences. Interim tax consequences can reduce the cash-management benefits of the CVD deal, and they require amending returns to be tax-free.
You can always keep all or part of your CVD money. The CVD amount you don't reinvest is taxable income.
Rejoice. Whatever you do with your CVD, you won't owe the dreaded 10% early withdrawal penalty tax on traditional IRA withdrawals made before age 59 1/2. The penalty tax does not apply to CVDs.
The SIMPLE-IRA is the same. IRS Notice 2020-50 clarifies that CVDs from a SIMPLE-IRA are exempt from the 25% early withdrawal penalty tax.
Good news. Recomputations of CVDs within three years are treated as direct trustee-to-trustee transfers, exempt from the annual IRA rollover cap.
Regret. IRS Notice 2020-50 allows inherited IRA beneficiaries to receive CVDs if
Only an IRA CVD eligible for a tax-free rollover can be refunded. CVDs received by inherited IRA beneficiaries (other than the surviving spouse of the IRA owner) cannot be refunded. So no tax-free rollover deal for them. Sorry.
If you have any questions about your CVDs, please contact us.
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Spencer Accounting Group, LLC does not provide investment, tax, legal, or retirement advice or recommendations in these blogs. The information presented here is not specific to any individual's personal circumstances.
Keana Spencer is an Accountant, Entrepreneur, and Educator to her clients, with a strong passion. Keana has over 10 years of experience and through her practice, she is a source of knowledge and strategies to her clients.