401k Cares Act Covid Withdrawal and Repayment?

[Critter-3]

You have a situation brewing ... before you get a chance to pay back the distribution and amend the return to show it and the repayment the IRS will most likely send you a CP2000 for the missing income.  Eventually you will need to address this issue one way or another. 

[fanfare]

@ShawnMc 

It's pretty simple .

amend your 2020 return and report any amount paid back so far (Form 8915-E).

any amount over one third, will be credited to your next tax return. (2021 Form 8915-F).

If you pay it all back in at least thirds within the time frame, there will be no tax.

If you can pay it back all at once now you can handle it all on 2020 amended tax return by not spreading it out.

[fanfare]

When amending to report tax-deferred actions, IRS says: attach an explanation sheet of what you did if you cannot fit  it all in Part III Explanation.

Include dates and amounts.

[FlaxSeedQ]

"Regular contributions from your paycheck does not count towards repayment. Only funds outside of the payroll situation would count. "

What about a contribution using funds from another retirement account? For example, early withdrawal of pension funds paid as a lump sum of $20K, which must be rolled over within 60 days to avoid penalties.  Would these funds be able to used towards repayment?

[fanfare]

If you use that 20K to pay back 20k,  they cancel each other out, but there's a catch. you may or may not have a tax in this year, because no more than one third of the original amount can be applied. any more would be taken in prior years  by amending (2022 is the last tax year).

If you have an early distribution you still pay the penalty.  it doesn't count as a 60-rollove

@FlaxSeedQ 

If you didn't divide by 3.0, you would amend your 2020 tax return to show the $20,000 paid back.

[Opus 17]

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@FlaxSeedQ wrote:

"Regular contributions from your paycheck does not count towards repayment. Only funds outside of the payroll situation would count. "

What about a contribution using funds from another retirement account? For example, early withdrawal of pension funds paid as a lump sum of $20K, which must be rolled over within 60 days to avoid penalties.  Would these funds be able to used towards repayment?

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A rollover does not repay a COVID distribution, because a rollover is a tax-free transaction.  To repay a COVID distribution, you have to use money that you have previously paid tax on.  This could come from a retirement account withdrawal, but only if you withdraw the money and pay the income tax on it (plus the 10% penalty if you are under age).  Or you will repay the distribution from savings or your paycheck after-tax, both of which are money that was already taxed in the past.  

It really doesn't make financial sense to repay one pre-tax retirement account by taking a taxable distribution from another retirement account, especially if you have to pay the 10% early withdrawal penalty.  

[tndfamily8]

If you received a distribution in 2020 and elect to pay over the 3 year period but didn't split the income equally?  Can I split the remaining amount in 2021 and 2022 or do I need to amend the 2020 taxes?  Example:  Received $60K and in 2020 only claimed $6,666 as income because I divided my amount wrong (60000/3=20000 and then 20000/3=$6666) so I put $6666 for 2020.   The calculation should have been $20K each year which means I was short $13334 for 2020.  Now my total amount due is $13334 in 2020, $20000 in 2021 and $20000 in 2022 which is a total due of $41,334 split over the next 2 years or do I have to amend and fix 2020 and have them all equally at $20K per year?

[Critter-3]

If you made an error on the 2020 return you must amend that return and the 2021 return if you have not yet filed it yet or correctly.   The ability to spread the distribution over a 3 year period had to be done evenly.

[tndfamily8]

Is there any way to get out of having to pay interest and penalties for the mistake?

[sbtopping19]

I chose to repay my Cares act withdrawl (taken 11/7/20) starting in early 2021 which I reported on my 2020 tax return. What is unclear is whether my final paymnet is due with my 2022 tax return filing or whether I can submit my rollover to occur 11/1/23?  I have heard final payment is actually due 3 years and 1 day after taking the withdrawl.  I have not claimed any of the amount as income over as I intend to pay the entire amount back so no need to ammend prior returns. Just looking for clarity on when final payment is actually due. Thans!

[JosephS1]

The discussion and back and forth on this subject seems to be one of different opinions.  I would suggest the IRS guidance may clear things up.

The following is an except from the IRS regarding repayment of a CARES act withdrawal:  

Q7. May I repay a coronavirus-related distribution?

A7. In general, yes, you may repay all or part of the amount of a coronavirus-related distribution to an eligible retirement plan, provided that you complete the repayment within three years after the date that the distribution was received. If you repay a coronavirus-related distribution, the distribution will be treated as though it were repaid in a direct trustee-to-trustee transfer so that you do not owe federal income tax on the distribution.

If, for example, you receive a coronavirus-related distribution in 2020, you choose to include the distribution amount in income over a 3-year period (2020, 2021, and 2022), and you choose to repay the full amount to an eligible retirement plan in 2022, you may file amended federal income tax returns for 2020 and 2021 to claim a refund of the tax attributable to the amount of the distribution that you included in income for those years, and you will not be required to include any amount in income in 2022. See sections 4.D, 4.E, and 4.F of Notice 2005-92 for additional examples.

Based on the above excerpt, I do not agree with the 3 years and 1 day hypothesis.  I read it as though it must be paid back within 3 years.  3 years and 1 day would obviously make it outside the 3 year window.

Coronavirus related relief

@adz88

[Opus 17]

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@sbtopping19 wrote:

I chose to repay my Cares act withdrawl (taken 11/7/20) starting in early 2021 which I reported on my 2020 tax return. What is unclear is whether my final paymnet is due with my 2022 tax return filing or whether I can submit my rollover to occur 11/1/23?  I have heard final payment is actually due 3 years and 1 day after taking the withdrawl.  I have not claimed any of the amount as income over as I intend to pay the entire amount back so no need to ammend prior returns. Just looking for clarity on when final payment is actually due. Thans!

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Tax laws are very specific as to dates.  For example, you must hold assets "more than 1 year" to be treated as long term capital gains.  More than one year is not the same as exactly one year.  Or, the new changes to the energy credits are effective "after 12/31/22" -- which basically means "on or after 1/1/23", but it's a shorter more specific way to say it.

If the CARES act says, within 3 years, that would be "exactly" 3 years or less.  So your last eligible date for a repayment to count would be 11/7/23.  And, because it may take the bank or broker a few days to process things, you should start a few days early.  If you ask for the deposit to be made 11/7/23 but it doesn't happen until 11/8 because of processing time, it won't count. 

[sbtopping19]

Thanks! Just need to confirm when we are actually required to make the final payment - at 2022 tax return filing or within three years of actually taking the distribution. 

[Opus 17]

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@sbtopping19 wrote:

Thanks! Just need to confirm when we are actually required to make the final payment - at 2022 tax return filing or within three years of actually taking the distribution. 

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In your case you can make a payment as late as 11/7/2023.  You would then file an amended 2020 return to report the distribution, your repayments, and calculate any tax you might owe.  Assuming you paid some tax in 2020, you would likely get a refund, since doing the repayment/rollover will lower your 2020 tax.

An amended 2020 return must be filed within 3 years of the original filing deadline, so July 15, 2024. 

[ShawnMc]

SamS1,

In my situation, I took a CACW in late 2020, forgot to include it on my 2020 return.  Did not report anything on my 2021 return and repaid it fully back to my 401K in early 2022.  Do I really need to amend returns or can I simply show the IRS evidence of repayment if they chase me on the missed reporting in 2020?  If the answer is that I must amend, can I simply amend 2020 and include the reporting of the repayment on the 2022 return? (and avoid having to amend 2021).  Will I be assessed a penalty/tax based on the fact that I did not report the distribution over the 3 year period?