Under the CARES ACT how does taxes apply for a withdrawal from a 401k? I heard you can spread the taxes out for 3 years but how does that work?

[macuser_22]

The CARES act §2202 says that a distribution  from a retirement account that is coronavirus related up to $100,000 and have 3 years to pay it back.

https://www.congress.gov/bill/116th-congress/house-bill/748/text#toc-H7E8FA907EAE04884809A56325BD425...

[MaryK4 · Accepted solution]

Each year you will include 33  1/3% of the amount you withdrew and add it as income each year.  As an example, this can help because instead of having to pay tax on $30,000 next year, you can add $10,000 each year. 

If you need to take money out of your retirement plan ASAP, keep in mind that the 10 percent early withdrawal penalty may be waived on up to $100K of retirement funds withdrawn if you are a qualified individual impacted by Coronavirus.  You are a qualified individual if:

• You, your spouse, or dependent are diagnosed with Coronavirus 
• You experience adverse financial consequences as a result of being quarantined, furloughed, or laid off
• You had hours reduced due to Coronavirus
• You are unable to work due to your child care closing or reducing hours

Additionally, income attributable to such distributions would be subject to tax over three years, and you may recontribute the funds to an eligible retirement plan within three years without regard to that year’s cap on contributions.

[rodaleks]

@MaryK4 , great answer. However, is it still possible to spread the payments if you move outside of the USA (not being a US Citizen nor a Green Card holder) anytime between end of 2020 and 2023 (when the last payment would be due)? Or would you need to pay whatever is pending at once on the next tax filing after leaving the country?

[Opus 17]

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@rodaleks wrote:

@MaryK4 , great answer. However, is it still possible to spread the payments if you move outside of the USA (not being a US Citizen nor a Green Card holder) anytime between end of 2020 and 2023 (when the last payment would be due)? Or would you need to pay whatever is pending at once on the next tax filing after leaving the country?

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We aren't going to know the precise answer to that question until the IRS releases the official tax forms for 2020 (and later, 2021 and 2022).  You will get a 1099-R for the withdrawal no matter what, so my guess is that after you enter the 1099-R, you will get a question "Is this a COVID-related distribution as defined by the CARES act?" and "Do you want to spread the taxes out over 3 years?"  If you click yes to both, then 1/3 of the income will be added to your income and the other 2/3 will be shown as a carry-forward on the form.

If you then leave the country and are not a citizen or green card holder, you would need to file a 1040-NR (non-resident tax return) for 2021 and 2022 to report the remaining income and pay the taxes.  If you didn't pay, the IRS may not be able to force you to pay, but they can certainly flag your file so that if you ever return to the US or have other US-sourced income, it can be withheld or garnished until you pay your taxes.

It could be that you would be required to pay the remaining 2/3 on your 2021 return, but you will have to wait for the forms to be prepared and the official regulations to be written to see how the IRS handles this situation.  (Once the law is enacted, the Treasury Dept has to create regulations to implement the law, and that can sometimes take a long time.)

The other concern, of course, is that if you are using COVID as an excuse to get your money out before retirement (since why leave it in the US for 30 years if you are not a citizen) and the IRS audits you, they could subject you to the 10% penalty for early withdrawal.  I have no idea how many audits the IRS will do of CARES act claims.  It seems an area ripe for abuse, but they are already overworked, so who knows?

[FrankIII]

I get the answer - thank you.  My 1099R says I took $xx,xxx ... TurboTax asks me to enter the amount from 1099R, but I don't get asked about CARES act contribution?  Where do I make the entry for taking ⅓ of the amount?  Do I simply override the 1099R entry for amount withdrawn and enter ⅓ of the amount even though the 1099R to IRS says differently?

[DoninGA]

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@FrankIII wrote:

I get the answer - thank you.  My 1099R says I took $xx,xxx ... TurboTax asks me to enter the amount from 1099R, but I don't get asked about CARES act contribution?  Where do I make the entry for taking ⅓ of the amount?  Do I simply override the 1099R entry for amount withdrawn and enter ⅓ of the amount even though the 1099R to IRS says differently?

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The IRS will be providing a new IRS Form 8915-E, Qualified 2020 Disaster Retirement Plan Distributions and Repayments (Use for Coronavirus-Related Distributions)

The form and instructions are currently in Draft Mode.  The IRS has not issued a date when the form will be available for filing with the 2020 federal tax return.  We assume it will be sometime in February 2021.

IRS Form 8915-E (draft) - https://www.irs.gov/pub/irs-dft/f8915e--dft.pdf

IRS Form 8915-E instructions (draft) - https://www.irs.gov/pub/irs-dft/i8915e--dft.pdf

[bondk05]

Will it automatically update in the turbo tax software we purchased when the new form is finalized?

[DoninGA]

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@bondk05 wrote:

Will it automatically update in the turbo tax software we purchased when the new form is finalized?

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The Form 8915-E is scheduled to be included in the TurboTax software on 02/24/2021