I took out an 401K early withdrawal due to Covid hardship. Turbo Tax keeps applying the penalty tax. How can I correct this?

 

Form 8915 -E, that reports the Coronavirus-related relief measures for retirement plan distributions, is not yet finalized by the IRS. TurboTax will update this section after the IRS releases the final version of Form 8915-E and then you can finish your distribution information.

 

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 you should see the “Your 1099-R Entries” screen
4. Click "edit" and 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)

 

 

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 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.

 

I thought the CARES act eliminated the required RMA. Is that true?

The RMD was waived for the 2020 tax year ... it was not eliminated permanently. 

RMDs were waived for 2020. The CARES Act provisions apply to most retirement plans, including traditional IRAs, SEP IRAs, SIMPLE IRAs, 401(k) plans, 403(b) plans, 457(b) plans, profit sharing plans and other defined contribution plans. The RMD suspension does not apply to qualified defined benefit plans.

 

You must indicate to TurboTax that none of the distribution was RMD. If you already enter the 1099-R as RMD and changing your answer to the RMD question doesn't work then you have to delete and renter the 1099-R form. 

 

If you returned money then you can indicate this in TurboTax.

 

Please follow these steps to enter your 1099-R and RMD rollover (returned money):

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”
4. Continue until "How much was a RMD?" and select "none"
5. Continue "Tell us if you moved the money through a rollover or conversion" and select "I rolled over some or all of it to an IRA or other retirement account within the time limits (normally 60 days)"
6. Continue answering the questions.

 

 

 

You can verify your entry by looking at your Form 1040 line 5:

1. Click on "Tax Tools" in the left menu
2. Click "Tools"
3. Click "View Tax Summary" in the Tool Center window
4. Click on "Preview my 1040" on the left

 @alskwara 

I am using turbotax Deluxe version and I don't have options:

• Click "edit" and continue until "Tell us if any of these uncommon situations apply" screen

or

• 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)

When will this section be ready? Do I need different version of turbotax?

Thank you! 

The 8915-E Form is projected to be e-fileable starting 02/24/2020. Please sign up here to get notified when Form 8915-E is ready.

 

 

Please be aware these option come up when you enter your 1099-R.  If you haven't entered any 1099-R information then use the search and jump function to get to the section and then answer the questions. After you entered the data from your 1099-R/ imported your 1099-R click "continue" and go through the question until you get to the "Tell us if any of these uncommon situations apply" screen.

 

 

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 information.
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)

 

 

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 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.

Thanks for your reply. After reading your instructions I was able to e-file my Federal return. But then when I got to my NY state return, Turbotax said I would not be able to e-file it, but it would have to be mailed.....due to the 401k covid distribution. Does this make sense? Thanks.

Yes.  New York State follows the federal treatment. The income will be included in New York adjusted gross income in the same year it is included in federal adjusted gross income.  But you will need to paper file.

 

We don't have specific information on the income qualifications or procedures for the third stimulus payment because the measure hasn't been passed yet. However, If you had issues receiving your earlier stimulus, then the best way to ensure that you are one of the first to receive any future stimulus payments is to file your 2020 tax return as early as possible and use direct deposit so that the IRS will have your updated information. 
 
You can find the most up to date information from the IRS here, and updates from TurboTax here as they develop.

 

 

I pre-paid the 10% federal tax and 5% state tax on my covid-19 withdrawal because i knew i could not repay the amount back to my 401 but TT shows I owe a large sum to both fed and state. My WI forms give me a large penalty multiplier of .33 of my prepaid federal tax. Why is that? I thought the penalty did not apply? Will the WI TT be adjusted with a future update? Help.

You verified the 8915-E is in your return and not the form 5329? The WI form line 22 has a .33 multiplier for penalties, not tax withheld. I think your 8915-E is not correctly filled out.

 

@DerekB