So you withdrew money from a retirement plan in 2020 and now have to figure out if it’s taxable. It’s somewhat complicated, so here’s our guide to Coronavirus-related retirement plan withdrawals.
The basics:
- Distributions of up to $100k for a withdrawal by a qualified individual are exempt from the 10% early withdrawal penalty.
- They are still subject to income tax.
- A qualified individual is someone who got COVID-19, had a spouse or dependent with COVID-19, or experienced adverse financial circumstances due to COVID-19.
- Option to pay all of the tax on this year’s return or spread it out over 3 years.
- You have three years to repay the amount you withdrew and not owe any tax on that.
For example:
Taxpayer is a qualified individual and withdrew $90,000 from her 401k in June of 2020. By December, she was confident that she wouldn’t need all of it and repaid $40,000. For her 2020 tax return she will receive a 1099-R showing a withdrawal of $90,000 and a Form 5498 showing a contribution of $40,000. She has to complete form 8915-E. She’s pretty sure she’ll be able to put the rest back, so she elects to have it taxed over three years. Here’s how the math works:
2020: The amount taxed is $90,000/3 or $30,000/year. For her 2020 return, the $30,000 that would be taxed is reduced by the amount that she repaid. She repaid $40,000, so she has no tax liability on her 2020 return and the extra $10,000 that she repaid rolls forward to 2021.
2021: In 2021, she repays an additional $25,000. For her 2021 return she receives a Form 5498 showing a contribution of $25,000. The $30,000 that would be taxed is reduced by the $10,000 that rolled forward from 2020 and the $25,000 that she repaid in 2021. This means that she pays no tax in 2021 and has $5000 roll forward to 2022.
2022: In 2022, she repays an additional $20,000. For her 2022 return she receives a Form 5498 showing a contribution of $20,000. The $30,000 that would be taxed is reduced by the $5000 that rolled forward from 2021 and the $20,000 that she repaid in 2022. This means that she pays tax on $5000 when her tax return is due in April of 2023.
“But wait!” you say. “What if your hypothetical taxpayer can’t pay back a dime until 2022 and then repays it all. Won’t she be out the tax on $60,000 ($30,000/year for 2020 and 2021)?” File an amended return. She will just amend her 2020 and 2021 returns and have those taxes refunded.
As I said at the start, it’s complicated, but it was a generous provision that Congress made and for those that were able to take advantage of it, it was a blessing.
