The COVID-19 pandemic brought financial challenges for many individuals, leading some to tap into their retirement savings for support. To provide relief, the government allowed penalty-free withdrawals from 401(k) and IRA accounts. However, the government is highlighting the deadline for repayment of COVID-era withdrawals to avoid tax consequences. In this blog article, Optima Tax Relief summarises the details, ensuring you’re well-informed about the approaching repayment deadline.
In response to the pandemic, the CARES Act was enacted in March 2020, permitting penalty-free withdrawals of up to $100,000 from retirement accounts. These withdrawals could be included as income over three years for tax purposes, offering flexibility to individuals in need. Importantly, the Act also provided the option to repay these withdrawals within a specified timeframe to avoid tax implications.
The clock is ticking, as the deadline for repaying COVID-era 401(k) and IRA withdrawals is approaching. Those who made use of this withdrawal option in 2020 must complete the repayment three years from the date they received the funds. However, it’s crucial to consult with a tax advisor or refer to IRS guidelines for the exact repayment deadline, which can vary based on individual circumstances. For example, Vanguard Group, a well-known investment management company, reported that 6% of their investors enrolled in a workplace retirement plan took a Coronavirus-Related Distribution (CRD), equal to about 268,000 people. However, less than 1% of these people have repaid their CRD by the end of 2021.
Interestingly, when investors took their CRDs, one of the perks was that they could spread their income-tax liability over the span of three years. For example, if an investor took a $10,000 distribution in 2020, they could report that income in increments for their 2020, 2021, and 2022 federal tax returns. However, in order to do this, the investor would need to file an amended return to claim a tax refund of the tax attributable to the distributed amount. Taxpayers should note that they will need to file amended returns for each year they spread their CRD income. If they only spread it over one year, they only need to file one amended return.
You would use Form 8915-E to report any repayment of a coronavirus-related distribution and to calculate the amount of any coronavirus-related distribution that needs to be included in income for a year. Taxpayers should do this whether or not they are required to file a federal income tax return.
As the deadline for repaying COVID-era 401(k) and IRA withdrawals approaches, it’s crucial to stay informed and take the necessary steps to repay the full amount by the specified deadline. Understanding the requirements, exploring repayment options, and seeking guidance from a tax advisor is essential to protect your retirement savings from unnecessary taxes and penalties. Don’t miss this opportunity to fulfill your repayment obligations.
Interesting Related Article: “How to Repay Loan Quickly While Also Improve Your Credit Score“