401k and Covid

Forum|Forum|4 years ago
June 8, 2022
2 replies
15 views

I took out a Covid 401(k) distribution as well that was also underrated meaning I didn’t pay enough taxes I thought I was but I only took out 10% it should’ve been more because I took out a considerable amount I took out 85,000 I paid back 15,000 last year and I have another 15,000 I’m wondering what happens if I just decide to keep the last 15,000 instead of giving it back to my 401(k). Will it be added into my taxable income?…. And if I normally make about $50,000 a year well that additional $15,000 put me in another tax bracket? I’m also wondering if I should change my exemptions from two to one or zero?…so that the most taxes can get taken out as much as possible every pay period, which is twice monthly.

Anonymous

Hello Kattak64,

Thank you for participating in our Ask the Expert event today. As to your question, I really need a little more information as it depends on how you chose to be taxed on the distribution and how and when you made the repayments and reported them to the IRS. Here are the two general scenarios:

Being taxed all at once - if you chose to be taxed on it all in 2020 then you have already been taxed and won't be taxed again. However, if you also said that you paid back $30,000 that same year but really didn't, then you will need to amend your 2020 return to reflect only the $15,000 you actually paid back which will increase the taxes you owed for that year.
Spreading the tax over 3 years - If you chose to spread the tax on the COVID distribution over the 3 years allowed, that is approximately $28,333 that will be taxed each year. If you paid back $15,000 in 2020, then you should have only been taxed on $13,333 in 2020. If you choose not to pay anymore back then you will be taxed on the 2nd $28,333 in 2021 and the final $28,334 in 2022.

See this article for the answer to your tax bracket question.

If you are not having enough withheld from your paycheck to cover your taxes, then you should look into changing your W-4, but that form does not use exemptions anymore. You can use this calculator to help you make those changes.