401K distributions

Forum|Forum|5 years ago
February 14, 2021
1 reply
4 views

Large 401k distributions in 2020 that are not typical caused a substantial tax bill. Is there a way to spread this tax bill over a period of years?

ColeenD3

Level 15

No, not unless you were affected by COVID. You have the option of paying in installments. Form 9465

Those who qualify as individuals directly impacted by the pandemic will be able to withdraw up to $100k from their retirement accounts without facing the 10% early withdrawal penalty.

You qualify if:

You, your spouse, or your dependent are diagnosed with COVID-19
You experience adverse financial consequences as a result of being quarantined, furloughed, or laid off
You had work hours reduced to COVID-19
You’re unable to work due to child care closure or hour reduction

The distribution would be taxed over 2020, 2021, and 2022. You’ll have that time to pay back the funds you withdrew, without the amount impacting that year’s cap on contributions, and if you pay back the amount within that time, you’ll be able to claim a refund on those taxes.

thisisMarkAuthor

Level 2

These were not early distributions. My wife and I were both over 63 and retired at the time of these distributions. While these distributions were neither Covid nor natural disaster related, they were used to complete building our retirement home. Taxes were withheld, but insufficiently.

ThickAsABrick

Level 4

But won't you get hit again and again (if you continue to take these withdrawals or RMDs in the coming years)? Or was this a one-time event. Curious myself.
As we age, these RMDs might eventually become substantial - ours already are.
I use the "RMD method" of paying taxes (i.e., avoiding paying quarterlies in retirement). In our case, I take out a bit more than I need to in late December and over-pay taxes a little knowing I'll get most of it back by April.