Is there a special tax break for people who withdrew from their 401K under the Cares Act?

[DanaB27]

Yes, 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.

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)

[rcselin]

The steps listed are not working for me.  Disappointing.

[DoninGA]

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@rcselin wrote:

The steps listed are not working for me.  Disappointing.

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Form 8915-E, Qualified 2020 Disaster Retirement Plan Distributions and Repayments is available for both the TurboTax online web-based editions and the TurboTax desktop CD/Download editions.

If you are using the desktop editions you have to update your software.  Click on Online.  Click on Check for Updates.

You need to enter or edit your Form 1099-R and answer the questions concerning a Covid-19 distribution.

[rcselin]

I deleted the 1099-R I previously imported from Fidelity.  I re-imported the 1099-R and I then got the question if it was a Coronavirus-related distribution.

[DawnC]

If you indicate that your distribution was covid-related, TurboTax will remove the early withdrawal penalty if applicable.  Then you will be able to elect to pay all of the tax in 2020 or to spread the tax over 3 years, 2020-2022.   The distributions and any repayments will be reported on Form 8915-E.   

The CARES Act also provides that any part of a COVID-19-related distribution is eligible for tax-free rollover treatment to be recontributed to a qualified plan within three years of receipt and therefore excluded from income.   Any amount recontributed is treated as a direct tax-free rollover where eligible or as an indirect rollover with the typical 60-day requirement adjusted to three years.   A recontribution is not subject to the one-rollover-per-year limitation. 

All COVID-19-related distributions must be treated consistently, either all reported fully in the tax year withdrawn or all reported ratably over three years.     @rcselin