A loved one passed away due to COVID-19. I took out money from my 401k to pay off a debt he left. Will I be penalized or is this a situation that can lower my bill?

[miriamh999]

Since I took out money from 401k before retirement I might have to pay an additional tax. I used most of the money I took out during COVID-19 to pay the debt of a loved one that passed away. Does this count as a situation that could lower my bill? There is one for "Death" but I don't know what expense applies to that situation.

[DanaB27]

The death exception is related to the 401K owner's death. Please see IRS Exceptions to Tax on Early Distributions for details.

But 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 or having work hours reduced because of COVID-19
• You’re unable to work due to child care closure or hour reduction because of Covid-19
• You experience adverse financial consequences as a result of closing or reducing hours of a business that you own or operate due to SARS-CoV-2 or COVID-19.

You can choose to have the distribution taxed over 2020, 2021, and 2022 instead of only in 2020. You’ll have three years to pay back the funds you withdrew, without the amount impacting that year’s cap on contributions. If you pay back the amount within that time, you’ll be able to claim a refund on those taxes paid when you file an amended tax return. Please see IRS Coronavirus-related relief for retirement plans and IRAs for more details.

The 8915-E Form is projected to be e-fileable starting 02/25/2020. Please sign up here to get notified when Form 8915-E is ready.

Once the Form 8915-E is live please follow these steps to enter your 1099-R:

1. Login to your TurboTax Account 
2. Click on the Search box on the top and type “1099-R”
3. Click on “Jump to 1099-R” and enter your 1099-R (if you started this before you should see the “Your 1099-R Entries” screen and will click "edit")
4. Continue until "Tell us if any of these uncommon situations apply" screen
5. Select "I took out this money because of a qualified disaster (includes COVID-19)" (TurboTax will walk you through questions once this section is ready)

I'm very sorry for your loss.

[SweetieJean]

That was nice for you to do, but any outstanding debts are the responsibility of the decedent's Estate.  You may be able to file a claim with that estate (assets, property) for reimbursement.  But you are most likely on the hook for the tax and 10% penalty on the 401(k) withdrawal.