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icemech2020
New Member

Can tax liabilities from pension distributions in 2020 (1099-R) be spread over three years?

Does the tax liability from a pension distribution have to be paid in it's entirety in the year it was received?
2 Replies
ColeenD3
Expert Alumni

Can tax liabilities from pension distributions in 2020 (1099-R) be spread over three years?

You can spread out your distribution if it is a qualified COVID distribution.

 

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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ColeenD3
Expert Alumni

Can tax liabilities from pension distributions in 2020 (1099-R) be spread over three years?

Regarding repayment:

 

Repayment allowed

The act allows — but doesn’t require — a qualified individual to repay all or part of a coronavirus-related distribution. Repayments are treated as rollover contributions (the usual 60-day rollover deadline is deemed to be satisfied), so qualified individuals can repay their distributions to any employer-sponsored plan that accepts rollovers or to an IRA. If a qualified individual takes an in-service coronavirus-related distribution and then terminates employment, the individual can repay the distribution to the employer’s 401(k) plan if it accepts rollovers from former employees. If not, the individual can roll the distribution over to an IRA.

 

The total amount repaid cannot exceed the amount of the distribution (so the distribution can’t be repaid with interest). Qualified individuals have three years from the day after receiving a coronavirus-related distribution to repay it. If a qualified individual takes more than one coronavirus-related distribution, then each distribution has its own three-year repayment period.

 

Example. Rita contracts COVID-19 from her husband, Tom. She takes a $50,000 coronavirus-related distribution from her 401(k) plan on May 1, 2020. Rita has until May 2, 2023, to repay the distribution. She takes another $50,000 coronavirus-related distribution from the 401(k) plan on July 1, 2020. Rita has until July 2, 2023, to repay the second distribution.

 

Plans not required to accept repayment. IRS anticipates that most plans will accept repayment of coronavirus-related distributions. But Notice 2020-50 clarifies that plans aren’t required to accept repayment. For example, plans that don’t accept rollovers don’t have to start accepting these contributions.

 

Limits on repayment. Although most 2020 distributions can be coronavirus-related, Notice 2020-50 clarifies that repayment is allowed only for distributions that would be eligible rollover distributions regardless of the relief. For example, a qualified individual can treat periodic annuity payments in 2020 as coronavirus-related distributions, but the individual can’t repay those amounts since periodic payments aren’t eligible rollover distributions. Similarly, a coronavirus-related distribution paid to a qualified individual as a beneficiary of an employee can’t be repaid.

 

Repayment

 

 

 

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