Recontribution of Coronavirus-Related Distribution and Interaction with Maximum IRA Contribution

[rocknrolls2]

Participant X left his job at Company M during 2020. He received a distribution of his remaining 401(k) account balance of $6,000. If X claims the distribution as a Coronavirus-Related Distribution taxable over 3 consecutive years, $2,000 would be taxable during 2020. However, if X contributes $2,000 to an IRA, he has repaid the distribution, resulting in $0 tax for that year. Assuming that X is over 50 years old. How much  may X contribute to a traditional IRA during 2020:  $7,000 or $5,000 ($7,000 - $2,000 recontribution)?

[Bird]

As far as I can tell the repayment is treated as a rollover - more precisely, a trustee-to-trustee transfer - and therefore is not a "contribution."

[RatherBeGolfing]

Agree with @Bird.  Repaying a CRD to an IRA is not a contribution.  You will see some people refer to it as a rollover since a 401(k) plan that receives a repayment would treat it as a rollover asset.  It is treated as a trustee to trustee transfer, so its not a contribution, and it does not count as a rollover for the one IRA rollover per 12 months rule.  

[rocknrolls2]

Thank you for your thoughts, Bird and RatherBeGolfing. While I have no doubt that the characterization of the repayment as a trustee to trustee transfer is accurate, I am not sure how that is helpful toward resolving my question. If I make any payment to a traditional IRA, does that mean that it MUST be characterized as a repayment and not a contribution, which may be deductible? Also, if there is a $6,000 total CRD, does that mean that the first $6,000 paid into the IRA MUST be a repayment and not a contribution? Or would I have the choice to limit the deemed repayment to one-third of the total CRD, depending on the method of taxation I select, with the remainder being treated as a contribution?

[RatherBeGolfing]

9 minutes ago, rocknrolls2 said:

If I make any payment to a traditional IRA, does that mean that it MUST be characterized as a repayment and not a contribution, which may be deductible?

No.

10 minutes ago, rocknrolls2 said:

Also, if there is a $6,000 total CRD, does that mean that the first $6,000 paid into the IRA MUST be a repayment and not a contribution?

No.

10 minutes ago, rocknrolls2 said:

Or would I have the choice to limit the deemed repayment to one-third of the total CRD, depending on the method of taxation I select, with the remainder being treated as a contribution?

You report the amount of repayments on Form 8915-E, from $0 to $6k.  If you repay less than 1/3 of the CRD, the remainder of the 1/3 must be included in income.  Its up to you.

[Lou S.]

On 3/17/2021 at 8:22 AM, rocknrolls2 said:

Thank you for your thoughts, Bird and RatherBeGolfing. While I have no doubt that the characterization of the repayment as a trustee to trustee transfer is accurate, I am not sure how that is helpful toward resolving my question. If I make any payment to a traditional IRA, does that mean that it MUST be characterized as a repayment and not a contribution, which may be deductible? Also, if there is a $6,000 total CRD, does that mean that the first $6,000 paid into the IRA MUST be a repayment and not a contribution? Or would I have the choice to limit the deemed repayment to one-third of the total CRD, depending on the method of taxation I select, with the remainder being treated as a contribution?

I agree with what Rather Be Golfing says. But in case it's not clear you have 2 separate limits.

For 2021 you have an IRA limit of $6,000 plus $1,000 catch-up if eligible.

Your CRD from 2020 can be rolled back to an IRA at any time up until 12/31/2022.

There is no ordering rule for how you deposit them to your IRA, you can chose to do one, or the other, or both.