401k Cares Act Covid Withdrawal and Repayment?

[adz88]

I understand that you can repay your 401K Cares Act withdrawal over the course of three years and recoup the taxes paid.  My question is does that money need to go into the same 401K that it was withdrew from? I have since my withdrawal rolled over that account into another 401K and no longer have the account I originally withdrew the money from. Second, do continued regular paycheck contributions to my current 401k count as repayment of the cares act hardship withdrawal? Even though I took money out of the account I never stopped contributing.  Example...took a hardship cares act withdrawal of 5K in March 2020 and since that time for the remainder of 2020 I continued paycheck contributions to my 401k of around 3K in total.

Thankyou!

[RayW7]

As of this writing and included in the link below the IRS does not specify as to what type of plan to repay the funds other than an Eligible Retirement Plan.  see Q7

According to IRS 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.

You can pay the withdrawal back in payments or one lump sum.  If you do not pay it back you will pay tax on it.

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.

Coronavirus-related relief for retirement plans and IRAs ...

[mrloserpunk]

This is helpful! Can you tell me how someone reports the repayment in turbotax? I cant seem to find a way to 1. Report a partial repayment and 2. edit the amount of income reported from the 1099. Any help would be greatly appreciated! 

[SamS1]

In TurboTax Online, enter your 1099R as received.  The following screen will ask for uncommon situations and there you will indicate it is Covid 19 distribution.  The screens that follow will ask follow up questions on the distribution and repayment.  Any repayment made prior to filing your 2020 tax return can be used to reduce the taxable portion of the distribution.

The 8915-E will be used for penalty relief from early retirement plan distributions and include the option to spread the distribution income over 3 years.  This may be a good option if the distribution is pushing you into a higher marginal tax bracket.  You may end up paying less tax if you spread the distribution over the 3 years

[Caseyblue]

Can first 1/3 repayment be made after filing return but before filing date ?

[Opus 17]

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@Caseyblue wrote:

Can first 1/3 repayment be made after filing return but before filing date ?

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To avoid having to file an amended tax return, you will have to report on your tax return, that you repaid the money.  The deadline in the case of a COVID distribution is 3 years (not 60 days, or by the filing deadline, which are the deadlines for certain other returned distributions).

As far as we know now, if you made a return of distribution any time in the 3 year window, that means having to go back and file amended tax returns (for 2020 if you paid the tax all at once, and possibly for multiple years if you chose the 3 year spread option).  That's going to be quite messy.  It's possible the IRS could create a form and process to deal with it on 2021 and 2022 returns, but a repayment within the 3 year deadline would always require recalculating the 2020 income tax.

Potentially this means you could report the distribution, claim you will repay the entire amount, and pay no tax.  When the IRS comes around to assess tax because their computers don't show a repayment, you could just say "I didn't get to it yet but I have 3 years."  I don't recommend it, but there is nothing in the law that says you couldn't do that, other than an auditor telling you to pay the tax now and amend later if you really did pay it back.

So I guess what I'm trying to say is, if you tell Turbotax that you made a partial repayment, and you file before you actually make the repayment, the only statutory deadline to actually make the repayment is the 3 years.  To keep things simple and avoid letters from the IRS, making the actual repayment before the filing deadline is probably the sensible thing to do.  Then if you make another partial repayment, you will have to file an amended 2020 return later.

[Opus 17]

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@RayW7 wrote:

As of this writing and included in the link below the IRS does not specify as to what type of plan to repay the funds other than an Eligible Retirement Plan.  see Q7

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I think the limitation will be that some outside plans might be unwilling to accept a "repayment" if the original payment did not come from them.  They would have no way to know it was a repayment, they may be reluctant to accept your work without some way to verify it (since they have their own compliance requirements with the IRS to manage.)

If I were you, I would plan to repay the original 401(k).  You might be able to rollover part or all of your 401(k) into a private plan after making the repayment.  You might be able to find an outside plan that will accept a "repayment" but I think it will be hard to do so.  

New contributions are NOT repayments.  New contributions are coming out of your pre-tax wages and are reducing your tax.  If you want to use that money as a repayment, you will have to stop the contributions, take the money in your take-home pay after taxes, and then send a check or electronic bank draft to the retirement plan.  

[Caseyblue]

My hope was to file 2020 return now & make 1/3 repayment to original 401k just prior to May 17 filing deadline. 

Hope that is OK

[Opus 17]

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@Caseyblue wrote:

My hope was to file 2020 return now & make 1/3 repayment to original 401k just prior to May 17 filing deadline. 

Hope that is OK

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Yes, that's fine.  You can file now, include the fact that you made a partial repayment, and make the repayment later.  As long as you make the repayment before May 17, you should not have any problems with the IRS. 

[fanfare]

if you file form 4868, you have until Oct 15 to repay for 2020,

and if you don't file until then you won't have to amend your return.

I talked to Vanguard, they will have no problem taking your repayment into a new or existing IRA.

I'm sure the other big outfits will be the same.

[crickethead37]

I lost my job in 2020 due to Covid and took a Cares Act withdrawal. When I filed my income tax return for year 2020,  I paid tax on a 1/3 of the withdrawal since I did not wanted to file an amended income tax form. I was rehired by a different company and have contributed to their 401K plan to compensate for the withdrawal. Understanding that the IRS does not have specific requirement to what account the funds need to be in, Do my contributions count towards the repayment of the 1/3 withdrawal for the current year? If so, what documentation will I need to file on my income tax return 2021?

[Critter-3]

New 401K contributions from your paycheck are NOT replacement payments for the Covid Act purposes. The money had to come from after tax income  not pre taxed contributions.  

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.

https://www.irs.gov/newsroom/coronavirus-related-relief-for-retirement-plans-and-iras-questions-and-...

[Opus 17]

@crickethead37 

New tax-free contributions are not repayments. At this point, there are no changes to your tax return and you will still pay tax on the remaining 2/3 of the withdrawal on your 2021 and 2022 tax returns.

If you want to return your contributions, you will have to contact the original 401(k) provider and ask if they will accept a return of contributions under the CARES act.  Or, you can ask your current 401(k) provider if they will accept a return of contributions from the previous plan, they might or might not. Or, you can open a private IRA and make deposits into that IRA. It would be treated as a special rollover rather than a contribution and you would not take a tax deduction on your tax return.  Before sending money to any plan, make sure that they understand and agree that this is a return of a CARES act withdrawal, and not a new contribution. You have to set this up in advance, and you have to use your own after-tax money, it is not a tax deductible contribution or a pretax payroll deduction.

If you make a return of the withdrawal, you would then go back and file an amended 2020 tax return to change your answers on what you did with the money.  Depending on when you make the return and how much you return, you might also have to file an amended 2021 tax return. Because of the complexities of filing more than one amended return, I would not file any amended tax return until after you have made all the returns that you plan to make. It would not be a good idea to make a partial return of funds, file an amended tax return, then make a second partial return of funds and file a second amended tax return.

You will have to decide whether it is better to make tax deductible new contributions and pay the tax on the withdrawal, or to stop your contributions, get the money in your paycheck, and then send it back as a return.  As long as you are in the same tax bracket now as you were before, the financial effect of either decision is about the same.  If you are in a higher tax bracket this year than last year, the current tax deduction on new contributions saves more money than returning the withdrawal.   If you are in a lower tax bracket now, returning the withdrawal may save more money in the long run than making new tax deductible contributions.

[m06wc21]

SamS1: In 2020, I took out 401k and chose to split it up over 3 years. This year will by 2nd year paying back a third. Do you know if I use the same 1099r I got for the original withdrawal, the same amounts and everything? For this years third... and next year as well? 

[Critter-3]

There is a new form 8915-F that will not be ready until mid March ... return at that time to complete the 1099-R section ... you will NOT enter the 2020 form again.