Is CRD repayment considered a rollover or contribution for purposes of contact with custodian?

[BPM11]

My client had a dog walking/care business until March 2020 when, because of coronavirus, discontinued the business for the remainder of year 2020.  He also converted 40,000 from a traditional IRA to a Roth IRA in year 2020 (20K in October, 20K in December) 

Tax was withheld on the conversion at 10%, resulting in in two 1099R's from the custodian; one showing a taxable distribution of $39600 with no tax withheld, the other showing a taxable distribution of $4400, with $4400 tax withheld. 

My client now feels he can afford to pay tax on the conversion, from funds outside the IRA and wishes to repay the $4400 before filing year 2020 tax return.  We've called the custodian a couple of times on this; the first custodian rep said the custodian would treat as a contribution, and the repayment of $4400 should be journaled/noted as CRD repayment. 

When we called the custodian a second time, the second rep said we were actually doing a rollover, and could only do the rollover online, and saw no need for notation on the $4400 repayment.

As we are outside the 60 window for a rollover involving IRA holder actually receiving funds, I don't see how this $4400 repayment could be considered a rollover.  Wouldn't entering the $4400 repayment on tax return as a rollover preclude use of Form 8915-E, which I think is actually appropriate for this situation?

Also, wouldn't Form 5498 coming out in year 2022, for this 2021 $4400 repayment show it as a rollover? I am wondering if it wouldn't be best to me to wire $4400 repayment as a contribution, and notate on the wire that it is a CRD repayment?

Any and all thoughts/suggestions greatly appreciated?

[qbteachmt]

Whew, that's a lot to address.

Is that: $40k gross and $4400 withholding = $35,600? That isn't 10%, either.

"My client now feels he can afford to pay tax on the conversion,"

And he will; it might be more than the withholding and it might be less; that $4400 is just prepayment. $40k gross is being added to his taxable reportable income.

What you might be thinking of is the "make up" amount, not the Tax. That doesn't change Withholding or Tax. What should have been addressed is the missing amount in the Conversion; he would "make up" that difference, so that the amount out of the Trad (the $40k gross) is the amount sent to the Roth. Instead, he only converted the Net to Roth. He "prepaid" the tax by the withholding, and by overlooking that amount for a full conversion.

And Conversions are not qualified to be coronavirus disaster distributions, because the repayment provision is for the same sort of activity as would be a nontaxable rollover. That means the $4,400 is all you report for the CRD, which he intends to repay to the Trad IRA.

"said the custodian would treat as a contribution, and the repayment of $4400 should be journaled/noted as CRD repayment."

They don't know what they are stating; it can't be both, obviously. And it won't be deductible, because it is not going into the Trad IRA under a qualification to make a Contribution. It's going to the Trad IRA under the terms of the extended repayment provision.

"the second rep said we were actually doing a rollover,"

Yes; the special disaster provision for the repayment being able to be done over 3 years is basically a rollover extension. It has to go back to the same type of account, but even if it is going back to the same account it came out of, it's considered a trustee-to-trustee transfer. 8915-E instructions:

"Amounts that are repaid are treated as a trustee-to-trustee transfer and are not included in income. Also, for purposes of the one-rollover-per-year limitation for IRAs, a repayment to an IRA is not considered a rollover.

"and could only do the rollover online, and saw no need for notation on the $4400 repayment."

I don't know about "online" because it has to come from some source of money your client has, outside of retirement already. Do it online, hand them money, why does that matter? Sheesh.

"Wouldn't entering the $4400 repayment on tax return as a rollover"

Think of it as "from Trad, to Trad." The Redeposit is a rollover, from that perspective. It's not a contribution.

"preclude use of Form 8915-E, which I think is actually appropriate for this situation?"

It's required, since you want to show the repayment, which would not normally be permitted.

And the $35,600 was a direct (trustee-to-trustee) conversion, so no 10% penalty, right? Because it doesn't qualify as CRD waiver. Only the $4,400 is CRD.

"Also, wouldn't Form 5498 coming out in year 2022, for this 2021 $4400 repayment show it as a rollover?"

5498 is for money In, and there is going to be money In, in 2021.

"I am wondering if it wouldn't be best to me to wire $4400 repayment as a contribution"

But Contribution is not the same as Rollover. Contribution includes income level qualifications, participation requirements, and deductibility options. The same money can't be both a contribution and a rollover. For instance, if the person qualifies to contributed $5k new money for 2021 against earnings, and also wants to repay their $4400 coronavirus distribution, they would put $9,400 into that account, but only $5k is the contribution.

Here's what you are overlooking. The $4400 is withholding, not Taxes. Set that aside.

8915-E instructions:

"Include on 2020 Form 8915-E any repayments you make before filing your 2020 return. Any repayments you make will reduce the amount of qualified 2020 disaster distributions reported on your return for 2020."

That will wash the $4400. Here are articles for the issue of Conversion not qualified for CRD treatment:

https://www.forbes.com/sites/deniseappleby/2020/07/03/can-you-convert-a-coronavirus-related-distribu...

https://www.dwc401k.com/blog/converting-crd-to-roth-ira

[BPM11]

Thanks very much for your response; it was very helpful!