10% 401K Withdrawl Penalty - How to spread it over three years as the IRS site explains.

[WellieBoots]

My 401K provider wouldn't allow or approve COVID withdrawls, and the hardship withdrawl was similar.  I did pull (withdraw) money out and used most of it for medical bills, but not all of it (not good, I know).  However, since they would not approve COVID withdrawls, I was unfortunately issued a 1099-R with a distribution code 1.

I got hit with the 20% withdrawl penalty at the time of withdrawl which I accepted.  Now the 10% early withdrawl penalty is being assessed on my taxes and consequently, we are facing a large tax bill (large for us).

However, can I spread the 10% penalty tax amount out over three (3) years?  How do I do this?  My 401K provider was no help.  I am not objecting to paying the penalty.  However, I do want to spread it out as much as possible.  I don't want to have an IRS debt, but don't want to be in a massive payment plan, so spreading out the penalty would work for us.  How do I do this?

Online research has been futile.  And I can't find anything in the TurboTax literature.

[CatinaT1]

You will report this on a Form 8915-E.  The IRS has not yet finalized the Form 8915-E for retirement plan distributions under the CARES act.  So this form cannot be included in the TurboTax program.  You will not be able to proceed until the form is available.

The IRS has not communicated when the form will be finalized for inclusion on the 2020 federal tax return.

We estimate it will be sometime in February 2021 before the form is available.  You can watch this link for the form availability.  Currently, the form is not listed here since there is no estimated date.  Once there is, you will find the form listed with the date available.  

IRS forms availability table for TurboTax individual (personal) tax products

Additionally, the IRS will not start processing returns until February 12, so waiting for this form is not slowing down the processing of your return.

Please sign-up here and we will email you once the form is live.

[WellieBoots]

Thank you.  To clarify, will I be able to defer the taxes over several years even though my 401K did not do COVID or hardship withdrawls?  I'm ok to wait for the forms.

Will anything affect me in the subsequent years or will TurboTax help me account for those deferrrals?

[DanaB27]

 TurboTax will most likely ask you about this distribution in the following years if you qualify. Please be aware that all tax withheld on your 1099-R will be credited towards 2020 and you might have to adjust your withholdings to account for the additional income in the next two years when you choose to have the distribution taxed over 3 years.

You qualify to spread the withdrawal from your 401k over three years 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.

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 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.

Please follow these steps to enter your 1099-R (once the form is ready):

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)

[WellieBoots]

That's my question, all the "reasons" you listed.  401K providers (likely via the employees company) had the option of offering or not offering COVID loans.  If it wasn/t categorized as a COVID withdrawl... that is my question.  They wouldn't offer that withdrawl type.

I understand I have to pay the penalty, I just want to spread it out.

[DanaB27]

No, if the withdrawal was not COVID related then you cannot use the Form  8915-E and spread the income tax out over three years.

But, it doesn't matter if your 401k provider classified it as not COVID related, if any of the following points apply to you then you can spread the withdrawal from your 401k over three years and use Form 8915-E:

• 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.

If you qualify you won't have to pay the 10% early withdrawal penalty.

[ron6612]

If someone under 59 1/2 takes early withdrawl from 401K in 2020 but will be paying it back over next 3 years do they still have to pay taxes on the amount withdrawn on their 2020 tax return and then claim a refund for the taxes when repaid?  Assume that the penalty will not be assessed since was part of Trump declaration?  Is there any way to not have to pay taxes on the amount withdrawn on their 2020 return?

[DanaB27]

Yes, you will have to pay income tax for the distribution on your 2020 return. Later, when you repay the distribution you can file an amended return to get a refund on the taxes paid.

From the IRS:

If you repay a coronavirus-related distribution, the distribution will be treated as though it were repaid in a direct trustee-to-trustee transfer so that you do not owe federal income tax on the distribution.

If, for example, you receive a coronavirus-related distribution in 2020, you choose to include the distribution amount in income over a 3-year period (2020, 2021, and 2022), and you choose to repay the full amount to an eligible retirement plan in 2022, you may file amended federal income tax returns for 2020 and 2021 to claim a refund of the tax attributable to the amount of the distribution that you included in income for those years, and you will not be required to include any amount in income in 2022.