With the holidays here and no additional immediate COVID-19 economic relief payment in sight, some folks likely have or are considering tapping their retirement accounts.
That option was made easier as part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act enacted on March 27. It provides more favorable tax treatment for withdrawals of up to $100,000 from retirement plans and IRAs, as well as allows in some circumstances for expanded workplace plan loan options, as long as the need for the money is coronavirus-related.
With the pandemic's second surge upon us, more folks are finding they're in coronavirus-related distribution (CRD) territory.
COVID stop-gap funds: My earlier post on tapping your retirement plan to cover COVID costs has more on this financial move, but here are some highlights:
- When you take money out of a traditional retirement vehicle — typically a tax-deferred IRA or 401(k) or 403(b) workplace plan — before you reach age 59½, you usually face a 10 percent penalty. That fine is waived for 2020 withdrawals.
- You still, however, will owe tax on any of the money you withdraw. But that tax amount can be paid over three years, beginning with the payout year. If you prefer, you still have the option to pay the tax in full with your tax return filing for the year you got the distribution.
- If within three years you recontribute the money you withdrew to make ends meet during the pandemic, your distribution will be treated as a rollover. That means you won't owe tax on the repaid retirement funds.
New pandemic withdrawal/pay-back form: Of course, if you do take money from a retirement account to help you make it through COVID-19 financial difficulties, you'll also face some added fling tasks.
Today's Tax Form Tuesday looks at a new form connected to these coronavirus retirement account distributions.
UPDATE, Feb. 18, 2021: It is Form 8915-E, which allows you to spread out the tax owed on these retirement payouts. Note that this form has now been finalized, as have its instructions. Download it or update your tax software.
The two-page form still is just a draft, hence the notation on the excerpt below. But it, as well as the draft instructions, give us an idea of what the Internal Revenue Service will want from taxpayers in this situation at filing time.
One thing to note when it comes to filing your first 8915-E is how you want to pay the tax due on your retirement plan distribution.
As discussed in the highlights bullet points, you can choose to either spread the income ratably over three years or report it all in year one. Whatever tax payment method you choose on your initial tax filing, you're stuck with it. You cannot change it.
Reporting repayments, too: Also, Form 8915-E is dual purpose. If you are able to pay back any or all of your CRD within three years, you'll use this same form to let the IRS know you put the money back into your retirement plan.
Finally, when you do repay your emergency COVID-19 retirement distribution within the allowable time frame, you'll need to file yet another form.
You can recover the income tax you paid on the distribution by filing an amended tax return. You'll do that by filing Form 1040-X, which was featured earlier this year in an August Tax Form Tuesday post
You also might find these items of interest:
- Made a tax mistake? Make amends!
- Old-fashioned amended return filings could cost IRS billions
- 5 things to know about workplace retirement plan hardship withdrawals
| Coronavirus Caveat & More Information In 2020, we're all dealing with extraordinary circumstances, both in our daily lives and when it comes to our taxes. The COVID-19 pandemic and efforts to reduce its transmission and protect ourselves and our families means that, for the most part, we're focusing on just getting through these trying days. But life as we knew it before the coronavirus will return, along with our mundane tax matters. Here's hoping that happens soon! In the meantime, you can find more on the virus and its effects on our taxes by clicking Coronavirus (COVID-19) and Taxes. |
Advertisements
Frank
I took a Covid related 401-k distribution of $100,000, and paid $25,000 in taxes at distribution. Instead of repaying the distribution, I want to include the distribution as income over 3 years. Can I do this through the Form 8915-E, which would then apply $33,000 as income to my 2020, 2021 and 2022 tax returns?
Amy
Does a Covid withdrawal have to be repaid back to the same retirement account withdrew from?
I withdrew from my active employer sponsored 401K but having difficulty repaying to that account. I have an old 401K at a brokerage firm can I roll the covid payback into that plan? Or open a separate IRA for the payback?
Cari
Are there specific forms for repayment of Cares Act withdrawals? My retirement plan will not let me repay the money yet. They have told me they do not have the forms from the IRS.
Lynne
Will the irs hold back stimulus is taxes owed due to a 401 covid withdrawal
Avi Gavade
Hi Kay,
I took withdrawal from 401K Emergency fund and repaid 100% it in March 2021. Do I still owe taxes on withdrawal. I got 1099-R with Box 7 as 1. How I need to show repayment in 2020 tax return?
Julie Kay
The only income I had in 2020 was a withdraw from my retirement account. What form do I file with the IRS?
Kay Bell
Michelle, I checked with several tax preparers. They agree that regardless of the code on the form issued by Fidelity (or any issuer), you are right: you need to file the 8915-E. Below is what they said. I’d share it with your tax preparer and, since you’re paying her, try to convince her to fill it out to be filed with your return. If she resists, you might want to consult another preparer. If you qualify, VITA can help at no cost. I hope this helps. Kay
— Lots of cases where the issuer can’t know what happened to the funds once they’re distributed. That’s why we have options to report it correctly on the tax return. And it’s up to us as good #TaxPros to query our clients to learn important details.
— The issuer doesn’t need to have the code right, how could they even know? it is up to the preparer to determine if the taxpayer qualifies, and if so fill out the 8915-E to remove the 10% penalty and decide to spread the income pro-rata over 3 years.
— We’ve had to change it to a 2 in the program so CA will file correctly. Welcome to 2020 tax season. The issuer wasn’t required to ask any questions so how would they know.
— I filed an 8915E and the distribution code said 1. How was the issuer to know if it was Covid related or not? The rules don’t require the issuer to know if the distribution was Covid related. It’s the preparer’s job to do due diligence to determine if relief is applicable.
— The issuer doesn’t need to have the code right, how could they even know? it is up to the preparer to determine if the taxpayer qualifies, and if so fill out the 8915-E to remove the 10% penalty and decide to spread the income pro-rata over 3 years.
michelle tidwell
My tax adviser said she wants fidelity to change the IRS code from a 1 (standard 401k withdrawal) to IRS code 2 ( 401kcares/COVID/disaster withdrawal), Fidelity told me it is illegal to change the IRS code- and that the 8915-E form is to be used to distinguish the 401K withdrawal as a disaster withdrawal. She refuses to file the 8915-E form. I dont know what to do in this case, I had to cut my work hours due to no child care/school for my dependent child.
Kay Bell
Michelle, you need to go back to your tax preparer. She’s familiar with your situation. Have her explain clearly what she wants and why. Kay
Michelle
My tax advisor will not fill out the 8915-e form because my fidelity statement has a IRS code of 1 so now she’s saying I need to have proof that the withdrawal was covid related. Can I just fill out the 8915-e form myself??
CJL
If in box 7 the code is U, and I am an eligible individual, is the distribution qualified, meaning I won”t get taxed the extra 10%?
Jerry Wade
If I am filing form 8915-e do I also file the 1099-R with the code 1 on my return?
Lea Natale
Hello,
I am filling out my 8915-e.. however; I already paid the federal taxes up-front when I got the money out. I am not seeing where I should put that I already paid. Can you please guide me on how I would put this information? Thank you.
Kay Bell
Mike, sorry, but no. If you took money out of your workplace retirement plan to get through some COVID-created financial difficulties, that amount needs to be repaid from your funds after you get your pay. If you’re still making regular contributions, those automatic paycheck amounts are not a repayment of what you took out. They are just continuing additions. Kay
mike
does the monthly 401k contribution i make through my employer count towards repayment ?
Kay Bell
Yes, Hollie (and so sorry for misspelling your name earlier!), interesting is a much nicer description than I would use! 😉 Fingers crossed for all of us! Kay
Hollie K Stewart
Thank you for responding! I am waiting it out obviously because I have to but just was getting a little worried I was printing and mailing my return in….something I have’nt done in a LONG time! This will be interesting to see how it goes for all of us.
Kay Bell
Hollie (and all others waiting for the 2020 version of 8915-E), the IRS issued a draft version yesterday, Feb. 10, so hopefully it will be ready soon. I know the filing season starts tomorrow, Feb. 12, but if you need this form, please be patient. Right now it doesn’t look like it 8915-E will be able to be e-filed. So if you do file electronically, you’ll also have to send along a PDF of the form. The IRS has told tax software companies that as an alternative to attaching a PDF of Form 8915- E, they/the users may instead include with their e-filed return a general dependency statement that includes all the information requested on Form 8915-E if they have issues with attaching a PDF. Wish I had better news, but they’re getting there. Thanks for reading. Kay
Hollie K Stewart
Any updates on the form being available? And if we can e-file it?
Pam Baker
Gabriella, Code 1 is fine.
Kay Bell
Chris, I know it’s frustrating, but the IRS should have it ready by the Feb. 12 official filing season opening date. Kay
Chris Daugherty
Hello, I took money out of my 401k due to Covid, but paid 20% taxes up front before I received my distribution. I am still waiting on this form to be finalized to complete my taxes.
Cindy
I had an RMD in 2020 that I was given the option of repaying to my 401(k), which I did, also in 2020. How do I get back the taxes that were withheld from that distribution?
Carol Hansen
I haven’t touched my TSP and am not required to for another 2 years. I did my taxes online but getting an error that I can’t submit them till the Form 8915E is available. Why would I need to submit that form if I made no withdrawals and don’t owe a pay back?
Mark Frisch
If I split the 401k withdrawal over three years, do I need to split the taxes I elected taken out over 3 years also?
mmw
So what if i tested positive with covid and took a withdrawl, Do i have to only pay taxes or will i have to also pay the 10% penalty, If i file 8915-e
SHERRY
WILL I BE ABLE TO E-FILE WITH FORM 8915-E.
gabriela contreras
Hi everyone! So for those of you that got a 1099-R my husband got funds from his under the cares act, and we got sent a code 1 on our 1099-R are we suppose to have a code 2 on their? In order to file the 8915-E? PLEASE HELP!
Tim
Where can i get the 8915-E from im trying to do my taxes
Kay Bell
Sorry, Mike, no time table yet. IRS says this is why it’s not starting to process returns until Feb. 12. It’s using this time to update forms, systems, etc. Kay
Mike
I have my taxes ready to go but can’t efile yet do to form 8915E isn’t out yet, any idea on when this form is supposed to be available?
Lauren
What if your 401k was disbursed because you were laid off due to COVID? Would that still count as a disaster withdrawal?
Kay Bell
Sherry, sorry, but no. The three-year payback option is only for emergency related withdrawals from retirement plans. Such withdrawals often are allowed in times of natural disasters, for example, when the only source of money a person has to make it through a hurricane, tornado, wild fire, etc., is from a retirement fund. Such withdrawals were added for 2020 for those in similar distress due to COVID-19. Regular pension plan distributions are not covered here. Kay
Sherry Hurt
Can I use the 8915-E to report the regular monthly pension I receive, so I can have 3 years to pay the tax?
Jose Laurencio
So one does not have to fill out Form 8915-E if they do not pay back into the 401k or divide the payment into 3 years. I just want to pay full taxes on 2020 tax filing. Is this correct?