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thisisMark
Returning Member

401K distributions

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?

9 Replies
ColeenD3
Expert Alumni

401K distributions

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.

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thisisMark
Returning Member

401K distributions

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 3

401K distributions

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.

ColeenD3
Expert Alumni

401K distributions

You are free to take any amount you want from your retirement accounts. The RMD is just what it says Required Minimum Distribution. You do have to pay taxes, however.

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thisisMark
Returning Member

401K distributions

Thanks for feedback, TAAB. These large distributions are a one year deal - will be more modest and regular in the future. 

thisisMark
Returning Member

401K distributions

Thanks, Colleen. Totally understand and expect to pay taxes. Main purpose of my question is to find a way to spread out the tax payment over some years rather than just quarterly. 

thisisMark
Returning Member

401K distributions

(continuation of previous post)

My appreciation to all who view, consider, and respond to my question. I suppose the crux of the answer depends on if the extra tax incurred as a result of use of distributions for home construction completion warrants a similar tax payment extension treatment as Covid, medical situation, natural disaster, etc... 

 

DianeW777
Expert Alumni

401K distributions

No. As indicated previously, there is no relief in your situation for investing in your home construction.  You may be referring to the ability to take funds from your 401(k) without penalty for your home.  In your case, you are not borrowing, or paying back, you don't have a penalty because you are at the right retirement age.  The only way to pay the income tax due over time is through the COVID relief.  

For more information about the COVID related distributions you can look here.

thisisMark
Returning Member

401K distributions

OOOOOOOOoooooooooooooo. You broke my heart!!!!!!!!!!   JK  😉

Appreciate you for helping me do the extra digging and for communication an absolute and unambiguous answer. Now I can file with no anxiety or regret over whether of not I took advantage of all options available to help with the big tax bill. Still going to hurt, though.

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