Question on impact to ACA subsidies if taking CARES act distribution

[NotCreativeName]

Summary:  trying to figure out if withdrawing retirement funds under CARES act (can repay within 3 years with no income tax due) will mess up ACA subsidies.

Background/Details: I retired early this year (on the cusp of 60, so not very early) and one of the keys to my budget is ACA subsidies for healthcare until I reach Medicare eligible age.  I have 1.5 years of cash on hand and plan to draw from brokerage account for 3 years. 

The wrench in my plan is that DH and I will likely need to downsize soon as he is having health/mobility issues.  We need 1 story and less property to maintain.  Thinking about how to sequence the order of buying/selling makes me realize that more cash would give us more options (since it will take us time to find the right place).

I am wondering if it would mess up my ACA subsidies for 2020 if I were to take the $100K distribution from my IRA and repay in 2021.  I can't seem to find any info on that topic.  Any feedback would be appreciated.

[secondcor521]

One article I googled seemed to imply that you would be required to report $33,333.33 of income on your 2020 tax return next year, then after you repaid the $100K in 2021 you could file an amended 2020 return reflecting that you had replaced the money.  During that period of time, your ACA subsidy reconciliation would be affected adversely.  Presumably you would get the lost subsidy paid back with the amended return, but you'd be out of pocket for that difference during the interim.

[NotCreativeName]

One article I googled seemed to imply that you would be required to report $33,333.33 of income on your 2020 tax return next year, then after you repaid the $100K in 2021 you could file an amended 2020 return reflecting that you had replaced the money.  During that period of time, your ACA subsidy reconciliation would be affected adversely.  Presumably you would get the lost subsidy paid back with the amended return, but you'd be out of pocket for that difference during the interim.

Thanks for the feedback.  That is what I am assuming, but I can't find any documents or articles that specifically address.  I would hate to "fall off the Obamacare cliff" as that's a pretty expensive oops.

[Paul der Krake]

There's no discussion of it because it's the logical thing to happen.

The CARES Act distribution are supposed to be for replacing income that you would normally have had from a job but are not because of the current situation. Not a freebie distribution for early retirees. It's no different than any other sort of income, which would also impact your ACA subsidies.

[NotCreativeName]

There's no discussion of it because it's the logical thing to happen.

The CARES Act distribution are supposed to be for replacing income that you would normally have had from a job but are not because of the current situation. Not a freebie distribution for early retirees. It's no different than any other sort of income, which would also impact your ACA subsidies.

I understand there are qualifications for the distribution - which I can meet.  Not looking for a freebie.  MAGI is a special animal in what's included/excluded. 

[ShellyFlorida]

Disclaimer: I am not a tax professional, IRS employee, lawyer or anyone with authority to provide interpretation or suggestion of how the CARES Act $100k retirement distribution will be handled as far as taxes are concerned. I'm merely a woman who likes to research, had a similar question and went in search of an "answer." I encourage you to speak with your own professional advisors.

See Q7 and the related referenced Notice 2005-92
https://www.irs.gov/newsroom/coronavirus-related-relief-for-retirement-plans-and-iras-questions-and-answers

In theory, if the IRS publishes the similar guideline that they did for Katrina (as their FAQ would suggest.) It appears that in theory, someone who qualifies for a penalty-free distribution under the Cares Act, could have use of the funds until their 2020 extension period (Oct 15 for most people) and not have it affect one's income. Even if one doesn't file an extension, it appears as though one could have use of the funds without including it in income as long as they repay it before they file their taxes.

https://www.irs.gov/pub/irs-drop/n-05-92.pdf
Page 11, 4D

If a qualified individual includes a Katrina distribution in gross income in the year of the distribution and recontributes the distribution to an eligible retirement plan after the timely filing of the individual’s tax return for the year of the distribution (i.e., after the due date, including extensions), the individual will need to file an amended tax return. The qualified individual will need to file a revised Form 8915 with his or her amended return to report the amount of the recontribution and should reduce his or her gross income by the amount of the recontribution, but not to exceed the amount of the Katrina distribution.

Example 1. Taxpayer B receives a $45,000 distribution from a section 403(b) plan on November 1, 2005. Taxpayer B is a qualified individual and treats the distribution as a Katrina distribution. Taxpayer B receives no other Katrina distribution from any eligible retirement plan in 2005. After receiving reimbursement from his or her insurance company for a casualty loss, Taxpayer B recontributes $45,000 to an IRA on March 31, 2006. Taxpayer B reports the recontribution on Form 8915 and files the 2005 tax return on April 10, 2006. For Taxpayer B, no portion of the Katrina distribution is includible as income for the 2005 tax year.

Example 2. The facts are the same as Example 1 of this section 4.D, except that Taxpayer B timely requests an extension of time to file the 2005 tax return and makes a recontribution on August 2, 2006, before he or she files the 2005 tax return. Taxpayer B files the 2005 tax return on August 10, 2006. As in Example 1, no portion of the Katrina distribution is includible in income for the 2005 year because Taxpayer B made the recontribution before the timely filing of the 2005 return.

[terran]

There's no discussion of it because it's the logical thing to happen.

The CARES Act distribution are supposed to be for replacing income that you would normally have had from a job but are not because of the current situation. Not a freebie distribution for early retirees. It's no different than any other sort of income, which would also impact your ACA subsidies.

It is somewhat different in that the distribution can/must be taken in 1 year, but the income is taxed over three years. That's not how most income works.

Since MAGI for ACA purposes starts with AGI I would guess (but don't know for certain) that the CARES distribution could be divided over 3 years for ACA subsidy calculations just like it can for income tax calculations. It all depends how the CARES act distributions end up on the federal tax forms.

[Paul der Krake]

There's no discussion of it because it's the logical thing to happen.

The CARES Act distribution are supposed to be for replacing income that you would normally have had from a job but are not because of the current situation. Not a freebie distribution for early retirees. It's no different than any other sort of income, which would also impact your ACA subsidies.

It is somewhat different in that the distribution can/must be taken in 1 year, but the income is taxed over three years. That's not how most income works.

Since MAGI for ACA purposes starts with AGI I would guess (but don't know for certain) that the CARES distribution could be divided over 3 years for ACA subsidy calculations just like it can for income tax calculations. It all depends how the CARES act distributions end up on the federal tax forms.

Yes, that’s how it’s going to work.

Re-reading my post I realize I didn’t make my point very well, so let’s try again.

There are two options on how to play this:
1. take the money out and recontribute within 3 years, which has no tax impact
2. take money out now, and don’t recontribute, paying taxes over 3 years

Option #1 is to help people with cash-flow because they have issues right now but will be fine later. It doesn’t really apply to mustachians who don’t have cash-flow problems. There isn’t really any obvious way to game this, whether you’re still working or retired. At best I can concoct a scenario in which a mustachian really wants to move some retirement money to taxable, maybe to buy areal estate or start a business. Which is OP’s situation.

Option #2 is where the potential for optimization could come in. But a mustachian who is still working doesn’t really benefit from this spreading income, and a retiree already has control over what their AGI looks like every year.

That’s why it doesn’t get discussed much. You need to be in a very specific situation for this to make sense, and that’s only if you can even show that you’ve been impacted.