Repaying COVID-19-related distribution to my 401k after plan withholding

[findchris]

Hi there.

I took a COVID-19-related distribution from my 401k and am ready to pay it back.  To make the numbers simple, let's say I requested the withdrawal of $100k, but the plan administrator withheld $35,200, ultimately giving me $64,800.  I am now ready to pay this back.

Questions:

(1) When paying back my 401k plan, would I pay $64,800 or $100k?  

(2) Do I need to amend 2020 taxes after repayment, or is form 8915-E sufficient?   Amendment seems odd, but is commonly referenced as required in this scenario.

I appreciate any insight here.

[fanfare]

1) you can pay back any amount up to the full amount. deposit with the custodian.

Some custodians are kind enough to add this option to online contribution page.

Otherwise, make sure custodian understands your intent.

An IRA payback would be simpler than a 401K payback.

BUT, you can pay back the 401K COVID withdrawal into an IRA instead if you want.

2) you must amend your return (Form 1040-X)  to get your refund.

[findchris]

Thanks for replying.  

To be clear, I do want to pay back the "full amount".  I just not clear if the full amount in this case is the $100k requested, or the $64,800 I received after withholding.  The full amount that ultimately needs to get back into my 401k is the $100k, so do that mean I pay that back, and then request that $35,200 withholding as a refund?  I think the confusing part to me is that any funds were withheld at all for this distribution, which means I need to come up with the $35,200 myself, only to request in back via as a refund (through an amendment?)).

@RayW7 @SamS1 @DaveF1006  - Tagging you guys as you all seem knowledgeable on this front.

[fanfare]

@findchris 

"I need to come up with the $35,200 myself, only to request in back via as a refund (through an amendment"

That's exactly the situation.

[fanfare]

Are you in the 32% bracket or higher?

if not, you paid maybe 24% and were already refunded a chunk of that withholding.

If you put back 65000 you will get back the tax on that which you can then pay back.

you have three years to pay it back.

You'd have to file another amendment No.2.

[DaveF1006 · Accepted solution]

@findchris   

1) First of all, you will repay $100,000.  The reason being is that the tax withheld has already been reported to the IRS. When you filed your tax return, you were credited with having paid the $35,200 on your tax return for the 2020 tax season as a tax withholding.

2) I found this interesting tidbit of information about the correct procedure in this IRS  link .  It states that "In general, yes, you may repay all or part of the amount of a coronavirus-related distribution to an eligible retirement plan, provided that you complete the repayment within three years after the date that the distribution was received. 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."  

This means that your $100,000 distribution will not be taxed because you repaid the distribution that is reported on the 8915-E.  

The link also mentions that you may file an amended return in the prior year when you made the election.  it states you may file amended federal income tax returns for 2020 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." 

[fanfare]

@DaveF1006 

The issue is, where to dig up $35,200  ?

[findchris]

@DaveF1006 - That is clarifying, thanks.

@fanfare - that was going to be my follow up - haha.  I get the after-tax amount as a loan to myself, but have to come up with an additional 50% of that amount, just to pay it back.  Very weird.

[fanfare]

it's very weird that you withholding percentage would be so high.

I thought it was typically 20%.

[fanfare]

If you took a COVID-related distribution, that is not a loan.

[findchris]

Hi again everyone.  I appreciate the correspondence.

Two follow ups:

(1) How exactly do I amend my 2020 return?  Which part am I amending?

(2) After filing an amendment, do you know the typically turnaround time for a refund?

Cheers!

[fanfare]

Did you elect to spread over 3 Years?

If YES, See Example 1 Page 3 here: 

https://www.irs.gov/pub/irs-dft/i8915f--dft.pdf

Good Luck!

[fanfare]

Since you haven't done anything yet, you currently don't have anything to enter on 2021 8915-F line 14 (for 401K).

BUT

"Any repayments made before you file your return and by the due date (including extensions) reduce the amount of the distribution included in your income."

[DaveF1006]

The best way to report this is as follows. 

1. Log into Turbo Tax assuming you use Turbo Tax online
2. When you reach the landing page, scroll to the bottom where your tax returns and documents are.
3. Select 2020, and click on the option to amend and change return.
4. Answer the questions about why you are amending
5. Once you begin working in your return, your refund monitor will reset to 0. 
6. Go to federal>income and expense>show more
7. IRA, 401(k), Pension Plan Withdrawals (1099-R)>review
8. In Review your 1099-R info, select the 1099-R this distribution was taken from
9. Scroll through the screens until you reach a screen that says, Tell us if you moved the money through a rollover or conversion
10. Here you will indicate I rolled over some or all of it to an IRA or other retirement account within the time limits (normally 60 days. Don't worry about the 60 day limit because you have three years to repay this loan.
11. Next screen asks, Did you rollover the gross amount of $10,000.00 (Box 1) to another retirement account? Here you will check Yes, I rolled over $10,000.00 to an IRA or other retirement account (or returned it to the same account) using my own money.
12. Since the amendments are mailed in, it could take 6-8 weeks to receive the refund.

[ Edited 01/10/22|07:43 PM PST]

@findchris 

@findchris 

[fanfare]

If you divided by 3.0 you owe one third on your 2021 tax return.

If you pay it all back now before you file, you get a credit for that one third on this years  2021 tax return, a credit of one third to be applied to next years tax return and a credit of one third to carry back on your amended 2020 tax return.

If you pay back less than the full amount, do the arithmetic.

if you did not divide by 3.0, you just amend your 2020 tax return.