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74tbspeed
Level 1

Early 401k distribution, reduce tax

Here's my situation. I took $40K in early distribution in 2020 from my 401k.

 

My work is furloughing me 10% for two years. Assume my normal salary is 80K per year, after furlough is 72K,  and a loss of $16K over two years.

 

Can I claim/exempt $16k from taxes for my 2020 tax returns? This will increase my refund.

 

I hope this makes sense.

 

Thanks.

6 Replies
macuser_22
Level 15

Early 401k distribution, reduce tax


@74tbspeed wrote:

Here's my situation. I took $40K in early distribution in 2020 from my 401k.

 

My work is furloughing me 10% for two years. Assume my normal salary is 80K per year, after furlough is 72K,  and a loss of $16K over two years.

 

Can I claim/exempt $16k from taxes for my 2020 tax returns? This will increase my refund.

 

I hope this makes sense.

 

Thanks.


No.   Any distribution is taxable.

 

If this was a COVID related distribution  then the tax can be paid over 3 years and no early distribution penalty.

 

Q3. Am I a qualified individual for purposes of section 2202 of the CARES Act?

A3. You are a qualified individual if –

  • You are diagnosed with the virus SARS-CoV-2 or with coronavirus disease 2019 (COVID-19) by a test approved by the Centers for Disease Control and Prevention;
  • Your spouse or dependent is diagnosed with SARS-CoV-2 or with COVID-19 by a test approved by the Centers for Disease Control and Prevention;
  • You experience adverse financial consequences as a result of being quarantined, being furloughed or laid off, or having work hours reduced due to SARS-CoV-2 or COVID-19;
  • You experience adverse financial consequences as a result of being unable to work due to lack of child care due to SARS-CoV-2 or COVID-19; or
  • 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.

Under section 2202 of the CARES Act, the Treasury Department and the IRS may issue guidance that expands the list of factors taken into account to determine whether an individual is a qualified individual as a result of experiencing adverse financial consequences. The Treasury Department and the IRS have received and are reviewing comments from the public requesting that the list of factors be expanded.

**Disclaimer: This post is for discussion purposes only and is NOT tax advice. The author takes no responsibility for the accuracy of any information in this post.**
74tbspeed
Level 1

Early 401k distribution, reduce tax

But the furlough is cause by Covid-19.

macuser_22
Level 15

Early 401k distribution, reduce tax


@74tbspeed wrote:

But the furlough is cause by Covid-19.


If it is COVID related then the distribution  is still taxable, but any early distribution penalty is waived and you can pay the tax over 3 years or pay the money back over 3 years so none would be taxable.

 

That is reported on the 8915-E form that is not available yet.

 

See below for a link to sign up for an email when the form is ready.

This form is necessary to report COVID related distributions from IRA's and other retirement plans to report the distribution, pay it back over 3 years or spread the tax over 3 years.

A COVID-19 related distribution is reported on a new 8915-E form that is not yet available and there is no estimated release date since the form is still in the draft state at the IRS. There is no telling how long it will take the IRS to make the electronic form available.

The draft paper form 8915-E is here:

https://www.irs.gov/pub/irs-dft/f8915e--dft.pdf
https://www.irs.gov/pub/irs-dft/i8915e--dft.pdf

Also to see if you qualify for a COVID-19 related distribution see:
https://www.irs.gov/newsroom/coronavirus-related-relief-for-retirement-plans-and-iras-questions-and-...

See this TurboTax FAQ to sign up for an e-mail when the form is ready.
https://ttlc.intuit.com/community/tax-topics/help/why-am-i-getting-getting-a-10-penalty-on-my-1099-r...

**Disclaimer: This post is for discussion purposes only and is NOT tax advice. The author takes no responsibility for the accuracy of any information in this post.**
74tbspeed
Level 1

Early 401k distribution, reduce tax

I think that is my confusion, maybe I'm thinking tax exemption, but it is the 10% penalty that is not applied.

 

Thanks!

74tbspeed
Level 1

Early 401k distribution, reduce tax

Then should I reclaim the full 10% penalty (of the $40k) or only what is equal to loss of income 4% (about $16k)?

It's unclear, what do other people do?

macuser_22
Level 15

Early 401k distribution, reduce tax


@74tbspeed wrote:

Then should I reclaim the full 10% penalty (of the $40k) or only what is equal to loss of income 4% (about $16k)?

It's unclear, what do other people do?


Nothing for now, until the 8915-E form is available since there is no way to report it presently.

**Disclaimer: This post is for discussion purposes only and is NOT tax advice. The author takes no responsibility for the accuracy of any information in this post.**
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