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Old Today, 01:32 PM
 
Location: Near Buffalo NY
46 posts, read 45,134 times
Reputation: 36

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I see that the CARES act allows the income tax on distributions from Traditional IRAs (and other stuff) to be spread over three years.
Any idea how it will be implemented? Like is the tax computed for the total distribution then you pay 1/3 each year? Or will it be considered that I took 1/3 the distribution the first year, 1/3 the second, and 1/3 the third.
Or will it be some other way?
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Old Today, 01:55 PM
 
80,906 posts, read 79,033,206 times
Reputation: 57181
It is tricky unless you do 1/3 each year


Example 1: You recontribute in 2023
You are eligible for the CVD privilege. You take one $100,000 CVD from your traditional IRA sometime this year. The $100,000 would be fully taxable under the regular federal income tax rules for traditional IRA withdrawals. (If you’ve made non-deductible traditional IRA contributions over the years, the withdrawal would not be 100% taxable, but we’re keeping things simple here.)

The JCT report explains that the usual way to line up federal-income-tax-free treatment for your CVD involves spreading the $100,000 of taxable income that you would report under the regular tax rules equally over 2020, 2021, and 2022. So, you would report $33,333.33 on your 2020 Form 1040. Ditto for 2021 and 2022.

After recontributing the entire $100,000 sometime in 2023, before the three-year window closes, you would file amended returns for 2020, 2021, and 2022 and get back the interim federal income tax hits for those years. At the end of the day, the CVD is federal-income-tax-free, as advertised. But it’s a chore to get there.

https://www.marketwatch.com/story/ta...nds-2020-05-04
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Old Today, 01:55 PM
 
3,668 posts, read 2,309,155 times
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From the irs website, if you took $9,000, you put $3,000 into taxable income each of the 3 years. You can also choose to elect to include it all in the year of distribution.
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Old Today, 01:58 PM
 
80,906 posts, read 79,033,206 times
Reputation: 57181
Quote:
Originally Posted by Thatsright19 View Post
From the irs website, if you took $9,000, you put $3,000 into taxable income each of the 3 years. You can also choose to elect to include it all in the year of distribution.
But you could follow the instructions above and get up to 3 years tax free
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Old Today, 02:26 PM
 
Location: Near Buffalo NY
46 posts, read 45,134 times
Reputation: 36
I am over 65 and taking RMD.
I am considering taking everything out (far more then $100,000). I can do that at anytime but have to pay the full tax hit (like it was wages).


Is this limited to $100,000 for everybody. I sort of assumed it was for people that are too young to take distribution. If the limit is $100,000 for me, then I have no use for this.


I was hoping to avoid the Tax Torpedo. Right now the account is fully invested in the ETF QQQ. I would sell the shares, take the distribution of the full amount, put it right back into QQQ. Then on 4/15/21 I would sell enough QQQ to pay the 1/3 taxes due. Then the next year and the following, the same.


Then I am RMD free, tax free except for capital gains on any QQQ I sell to cover living costs.


Please, no words of caution about QQQ could go down. I have my own philosophy on the market.


I just had a thought. Is there some protection for IRAs in case I am sued that I would lose if I did this?
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