Up to $100k withdrawal of IRA tax free?

Question

https://www.marketwatch.com/story/coronavirus-stimulus-package-tax-relief-withdraw-100k-from-your-ira-and-repay-in-3-years-with-zero-tax-liability-2020-03-27?reflink=mw_share_email

Just read this article and might be great news for syndicators.

A lot of people are seeing this as just an opportunity for a money grab, but that is not what the laws intentions are. Helping people who are affected by this chaos, get back up on their feet or help them move forward in life, while supporting everyone else by keeping money flowing in the economy. Far better way to stimulate than the previous administration's attempts.

What do you think?

Charles LeMaire · Answer

I turned 67 earlier this month, so am way passed the 10% withdrawal penalty.  I amassed quite a bit of money during my working days with 401Ks, which was created about the time I got out of school and started working.  So in that way I am a big fan.  But during my early 50s, I learned of RMDs, did a few calculations, and decided to decrease my contributions to match only.  Today, I have a lot of traditional IRA money that is a result of those 401K contributions.

A few years later, the company added a Roth 401K and I moved my contribution to that.  Stupidly, I did miss the early easy conversion window to Roth.  And I missed the Dot Com and Bank Crash opportunities to convert -- take a hint, convert when it's down to get more bang for your buck.

Now to the topic above: to take the $100K or not?   The Beer Virus allows you to take $100K out, hold it for 3 years and return it for NO TAX or keep it for and pay the tax, no 10% penalty. There are several types of persons, some can save and invest for tomorrow and some waste on today.  If you're an investor, can pay the tax, you are at a reasonable tax rate, take the money, pay the tax, and invest it wisely.  But if you plan to vacation, buy a car, a TV or whatever, leave the money alone!

Realize that non-Roth Qualified plans (traditional plans) only win if you put money in at a higher tax rate than when you take it out.  If you plan to be near broke (SS and low RMDs only) when you retire, you can take the money out at very low rates, so you win.  The cat-food retirement plan.  Do you think that tax rate will decrease from now, from the lowest it has been in since before WWII?  Or do you think it will increase?  My bet is that the rates will climb to at least the pre-Trump rates after Trump. So contributing to traditions today makes very little sense - Roth good!  Maybe at very high incomes it's beneficial.  With normal income, converting to Roth and the above withdrawal can make sense.  DO THE MATH.

Does a Roth win?  Often it does.  But as this is BP, consider the RE investing folks.  If you make about 45% of your returns from Cap Gains, keeping fund in hand rather than in a traditional or Roth wins.  IRAs do not enjoy the advantage of Cap Gain rates, it all comes back to you at income rates.  Will your income put you above 15% or 20% tax rate in retirement?  So first guess where rates will be, then guess your income.  Do some Roth, but consider doing your RE outside IRAs.

I promise my opinion is worth what you paid for it.  Remember, Grain of Salt!

Regards,

Charles LeMaire

Michael Jackman · Answer

@Caleb Heimsoth Agreed, if you don't pay it back. It is still a great way to finance ventures during that time. For those investing in long term contracts, this won't work. But for those who want to BRRRR, flip or join in syndication for that defined duration, this would be a great way to do it.

As with all investments, you must tread carefully.

Caleb Heimsoth · Answer

@Michael Jackman sounds like a good way to get hosed if you don’t repay it within 3 years.  Tread carefully

Brian Eastman · Answer

@Arin Fowler @Michael Jackman

Firstly, in order to take a Coronavirus-Related Distribution one must qualify due to coronavirus financial distress.  These relaxed rules were meant to help stave off financial disaster, not provide "access" to your tax-sheltered retirement savings.

The tax amount due on the distribution can be paid in 1/3 increments over 3 tax years from 2020-2022, or paid in full with the 2020 tax year.

If you are in distress, but take $100K in a distribution, that likely means the distribution will be taxed at some combination of 22% and 24%, so let's call it 23% That means roughly $23K that you will owe in taxes one way or another.  Do your investments produce this or do you need to hold back $23K of the distributed amount and have only $77K to invest?  If you use outside savings to pay the tax, you then have to look at the opportunity cost of using that money.

Any scenario needs to consider the opportunity cost of leaving the money in the plan.  Of course, at this time that is nearly impossible to do, but if the economy returns to normal over a 3 year period, the $100K left in the current plan would probably see a pretty good return.

If you put the money back into an IRA/401(k) by the end of 3 years, you then need to file amended tax return(s) to get the refund of the tax paid.  Considering the cost of filing, it would seem to make sense to take the tax hit all in the first year so you only have one return to amend.

Contrary to a prior post, you may not incrementally draw over the 3 year period.  All Coronavirus-Related Distributions must be taken during the 2020 calendar year.

Bottom line.  This is not a "I read it on the internet..." topic.  If you are considering such a move, please consult with your licensed tax advisor first.

Arin Fowler · Answer

@Michael Jackman

I've been doing some napkin math exploring the possibilities. Disclaimer: I haven't factored in any possible tax implications.

My thoughts thus far would be to withdraw money for a down payment, pay all cash flow back into the IRA, then use a balloon-esque final payment after 36 months.

Let's say $20k down for a $100k SFR that meets our cash flow goal of $200/month. Depositing the cash flow will pay down $7200, leaving you with a final payment of $12,800. Seems fairly reasonable if you budget other income for the final payment.

A huge benefit here is that the property goes into your regular portfolio instead of remaining in your SDIRA.

Thoughts?

Michael Jackman · Answer

@Charles LeMaire

Great input! Thanks for clarifying. No, do not! take out for negative return toys! I would think those on BP would know this already, but again thank you for reiterating that.

I also love your input on what the tax rates will be after those 3 years to know if it is a good time to pull out since you won't have to pay the 10% penalty. Time will tell on that one.

As for the tax bracket bump, yes, that is also something to take into consideration. Though you can pull from the IRA over those three years in smaller amounts and strategically stay underneath the threshold you prefer.

How does this compare to setting up a SDIRA? Which seems to be a better way to go, from what I understand of it. I don't know what the hassles are either way. One, you have be infected with or directly affected by the virus to take advantage of the new bill. The other, you have to set up an account with a custodian. Since I haven't done either I really don't have any input. But I would love to learn about it from those who have.

Stay safe!

Up to $100k withdrawal of IRA tax free?

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