Untitled Document

July 2024

IRS Procedures For Disaster Distributions And Repayments – Helping Your IRA Customers

The U.S. tax laws have been written to allow taxpayers who suffer loses because of disasters caused by extreme weather conditions and other events to receive special tax relief. An IRA accountholder is permitted to access the funds in his or her IRA. There are four special tax provisions applying to a disaster victim:
1. A taxpayer’s tax filing deadline may be extended by 3-6 months;
2. An IRA accountholder who is under the age of 59 1/2 does not owe the additional 10% tax upon taking a distribution;
3. A person who takes a disaster distribution may spread out this distribution over 3 tax years rather than having to include the distribution in income in one year and
4. A person has 3 years to repay or rollover the disaster distribution rather than 60 days. By repaying the entire amount the taxpayer will not have to include the distribution in his or her income for any of the 3 years.

Duties of the IRA Custodian
An IRA custodian’s duties with respect to disaster distributions are limited. You will process disaster distributions as you normally do. The IRS and the individual are not in general informed on the Form 1099-R that a distribution was a disaster distribution. The IRS does give the IRA custodian the discretion to use either code 2 or code 1 in box 7 if the IRA accountholder is under the age of 59 1/2. If code 2 is used, the IRS is informed that the IRA custodian knows that an exception to the 10% tax applies, but the IRS is not informed which exception applies.

Duties of the IRA accountholder or the IRA beneficiary
An IRA accountholder or beneficiary has the duty and right to classify a distribution as a disaster distribution. The IRA accountholder does this by filing Form 8915-F. This form is 4 pages. It is set forth on pages 9-12. There are 52 pages of instructions. A person who takes a disaster distribution has 3 years in which to repay the distribution. A person may inform the IRA custodian that their distribution is a disaster distribution, but the IRS does not require that this be done.

Form 8915-F is to be completed by a disaster victim to report that she or he had a qualified disaster distribution and if she or he repays some or all of this distribution. A person files Form 8915-F with their federal income tax return be it Form 1040, 1040-SR or 1040-NR. Sometimes it will be necessary to file an amended Form 8915-F. This form is designed to report transactions from multiple years.

CWF Form 65-DIS or a similar form should be completed if an IRA accountholder repays a disaster distribution. The IRA accountholder should certify that she or he is eligible to make this repayment. The IRA custodian will report this repayment to the IRS and the individual by completing boxes 15a and 15b on Form 5498. The individual will complete Form 8915-F.
SECURE Act 2.0 as signed into law by President Biden on December 29, 2022 made a major change in tax rules applying to Disaster Distributions. Disaster Distributions made on or after January 1, 2023 are limited to $22,000. Prior to the law change a person could withdraw $100,000 as a disaster distribution. Although President Biden has stated numerous times that he would never sign into law a tax bill which increased the income taxes on those individuals earning $400,000 or less, he did just that. A person who now withdraws between $22,001 - $100,000 will have to pay taxes she or he otherwise would not have paid because that amount must now be included in income. If the person wishes to repay or rollover the amount in excess of $22,000, she or he will need to comply with the standard IRA rollover rules. The person must complete the rollover within 60 days unless the IRS would grant additional relief and the person must comply with the rule that a person is allowed to rollover only one distribution per year (i.e. a 365 day period).