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IRS COVID-19 relief for US Individual Retirement Accounts

As part of the COVID-19 relief measures, the Internal Revenue Service (IRS) provide significant relief for holders of Individual Retirement Accounts (IRAs) in response to the COVID-19 pandemic. 
Early distribution

Last updated: 2 July 2020

This is in the form of relaxation of the contribution and distribution rules, which we will explore in more detail in this insight.

1. Early distributions for COVID-19 sufferers

To help IRA or other qualified plan owners who have suffered from COVID-19 (either physically or financially), the IRS allows most IRA owners to take tax relieved “coronavirus-related distributions” of up to $100,000, which is spread across all IRAs and qualified retirement plans. These rules apply throughout 2020. 

To be eligible for a coronavirus-related distribution, an IRA owner, spouse or dependent must have tested positive for COVID-19 using a CDC-approved test. Alternatively, if you’re an IRA owner that has experienced adverse financial consequences due to an inability to work, you may also eligible.

The coronavirus-related distributions are treated in a similar way to a loan from the plan. They are exempt from the 10% early distribution tax penalty, taxed proportionately over three years (unless the owner elects immediate taxation) and repayable within three years. Any amounts repaid to a qualifying plan are not taxable. 

About the author

Holly Payling

+44 (0)20 7710 0394
paylingh@buzzacott.co.uk
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Last updated: 2 July 2020

This is in the form of relaxation of the contribution and distribution rules, which we will explore in more detail in this insight.

1. Early distributions for COVID-19 sufferers

To help IRA or other qualified plan owners who have suffered from COVID-19 (either physically or financially), the IRS allows most IRA owners to take tax relieved “coronavirus-related distributions” of up to $100,000, which is spread across all IRAs and qualified retirement plans. These rules apply throughout 2020. 

To be eligible for a coronavirus-related distribution, an IRA owner, spouse or dependent must have tested positive for COVID-19 using a CDC-approved test. Alternatively, if you’re an IRA owner that has experienced adverse financial consequences due to an inability to work, you may also eligible.

The coronavirus-related distributions are treated in a similar way to a loan from the plan. They are exempt from the 10% early distribution tax penalty, taxed proportionately over three years (unless the owner elects immediate taxation) and repayable within three years. Any amounts repaid to a qualifying plan are not taxable. 

UK residents - be careful!

UK residents – be careful!

If you’re a UK resident, take caution. Although the special distribution may be tax free in the US, they may not necessarily be so in the UK. The US-UK tax treaty states that any pension payment not taxable in the US will also not be taxable in the UK. This is welcome news, but there could be a timing problem as the amounts will only not be taxable if repaid within the 3 year window. Let’s look at an example below.

Ms Garlic, a US citizen living in the UK, is a self-employed dog groomer, who was unable to work due to the COVID-19 restrictions. She withdraws $90,000 from her IRA on May 5, 2020, intends to repay the amount to her IRA within 3 years (by May 5, 2023) and meets the IRS criteria for the COVID-19 distribution relief.

The payment falls within the 2020/21 UK tax year and the return and tax payment for this year is due on January 31, 2022. This means that provided the $90,000 is repaid to the IRA prior to this date, none of the distribution will be subject to UK tax. This is over 15 months earlier than required under US law. Assuming this is Ms Garlic’s only income, any amounts subject to UK tax will be taxed at 20%-40% rates. 

If the withdrawal had been made prior to April 5, 2020, this also falls into the 2020 US tax year, but would fall into the 2019/20 UK tax year with tax due on January 31, 2021.  If the UK return is filed and tax paid before the IRA “loan repayment”, the return can be amended and a refund of UK tax claimed. However, if the amount is not repaid you should ensure the foreign tax credit position lines up correctly in both countries.

For example, if on January 31, 2022 Ms Garlic still has not repaid $30,000 of the loan, this will be taxable on her 2020/21 UK tax return at 20%. Assuming this tax was paid in 2022, this could lead to a mismatch of foreign tax credits as the pension would be taxable in 2020 for US tax purposes (or 2020, 2021 and 2022 if spread over 3 years). 

Required Minimum Distributions (RMDs)

2. Required Minimum Distributions (RMDs) do not need to be taken in 2020

To help preserve assets held in pensions, as assets continue to fall in the centre of the COVID-19 pandemic, the IRS permits pension owners to skip RMDs that they would have been required to take in 2020 from their Individual Retirement Accounts (IRAs) or other qualified plans. Any RMDs made in the period on or after February 1, 2020 and on or before May 15, 2020, may be rolled over to an eligible IRA or eligible retirement plan within 60 days, provided it meets other applicable rollover requirements.

IRA deadlines extended

3. IRA deadlines extended from April 15,2020 to July 15, 2020 for a number of different scenarios

Here are some of the key reliefs:

  • The deadline to make annual IRA contributions for 2019.
  • The deadline to remove 2019 excess contributions.
  • The deadline to report and pay the 10% tax for 2019 early distributions. 
  • The deadline for IRA owners to report and pay the 10% additional tax for early distributions taken in 2019. 
  • The deadline for IRA owners to re-characterise 2019 annual contributions made to a Traditional IRA as an annual contribution to a Roth IRA and vice a versa.
Get in touch
Get in touch

If you feel that greater flexibility with withdrawals or contributions from your IRA would offer you welcome relief from COVID-19 measures, or for support in meeting the July 15, 2020 deadlines, please fill out the form below and one of our experts will be in touch to discuss the different reliefs available to you.

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