Taxation and Repayment of COVID-Related Retirement Distributions

^{By Twila Slesnick, Ph.D., Enrolled Agent}

During 2020, "qualified individuals" affected by COVID-19 were permitted to withdraw up to $100,000 from an IRA or an employer plan, like a 401(k) or 403(b), without incurring penalties. Those who did withdraw funds under this provision still have to pay income tax on the distribution, but some special rules were enacted to ease the tax burden. Here's how to report the withdrawals to the IRS and figure out the taxes owed.

Do I Have to Pay Tax on the COVID-Related Distribution?

If you were a qualified individual (see below) and you withdrew money from your 401(k), 403(b), or IRA, you won't owe the 10% early distribution tax that would normally apply to distributions for those who are younger than 59 ½.

You will, however, need to pay income tax on the distribution (unless it was from a Roth IRA). If the distribution was from a 401(k) or 403(b) plan, the distribution was not subject to the mandatory income tax withholding that would normally apply. (And there is no mandatory income tax withholding for IRAs.) Either way, you'll pay all of the income tax for the withdrawal on your tax return.

If you're worried you'll owe a lot of tax, you can spread out the distribution over three tax returns so that you'll owe less tax. You will report one-third of the amount of the distribution as income on each of your tax returns for the years 2020, 2021, and 2022. For example, if you took a coronavirus-related distribution of $30,000 in the year 2020, you would include $10,000 as income in each of the years 2020, 2021, and 2022.

Alternatively, if you are in a very low tax bracket in 2020 (perhaps because of a COVID-related job loss or profit loss), you can make an election to include the entire coronavirus-related distribution in income in 2020 (you would report this on your 2020 tax return, which is due May 17, 2021).

For any year in which you took a coronavirus-related distribution (or "recontribution"—see below), you must file a Form 8915-E with your tax return.

Who Is a Qualified Individual?

A qualified individual is defined as someone:

• who had been diagnosed with COVID-19
• whose spouse or dependent had been diagnosed with COVID-19, or
• who had experienced adverse financial consequences as a result of:
• being quarantined due to COVID-19
• being furloughed or laid off or having reduced hours due to COVID-19
• being unable to work due to lack of childcare because of COVID-19, or
• having experienced a closure or reduced hours of a business they owned or operated because of COVID-19.

What If I Repay the COVID-Related Distribution to My Retirement Plan?

If you choose, you are allowed to "recontribute" some or all of the coronavirus-related distribution to your retirement plan or IRA at any time during the three years after you take the distribution. If you do so, you will not owe tax on the portion you repay. This rule applies only to the original participant or owner (or a surviving spouse). (That means that nonspouse beneficiaries of inherited plans cannot repay distributions to the retirement plan, though they were permitted to take coronavirus-related distributions.)

The three-year period for recontributions begins the day after the coronavirus distribution (Day 1) and ends on the third anniversary of Day 1. So if you took a distribution from your retirement plan on June 1, 2020, the three-year period during which you can repay the withdrawal without it being taxed as income begins on June 2, 2020 and ends on June 2, 2023.

You don't have to pay back the full amount. Any amount you pay back during the three-year repayment period will reduce the amount of the income you must include for the year of the repayment.

You do have to file a new IRS form, Form 8915-E, with your tax return to report the distribution and the repayment.

If you recontribute part or all of a distribution after paying taxes, you may have to amend your tax returns.

If your repayment for a year is more than the includible amount for that year, you may either carry the excess forward to another installment year, or carry it back to a previous installment year. If you carry it back, you will need to file an amended return if you have already filed your return for that year.

What If I Die Before I Finish Paying Back the Distribution?

If you were to die before you have a chance to include all of your coronavirus-related distribution in your income (for up to three tax returns), and pay taxes on it, the remaining amount would have to be reported as income on the tax return for the year of your death.

_{Updated April 6, 2021}