tax tips — February 25, 2021

Retirement Account COVID Relief—What We Know So Far

by Susannah McQuitty

You can take early retirement distributions penalty-free for COVID-19 relief.

You may have heard that tapping into your retirement savings account early due to COVID-19-related hardship is allowed without penalty. We’re happy to say that the rumors are true in this case! Here’s how to handle Coronavirus-related distributions from your IRA or employer-sponsored retirement plan (e.g., 401(k)), and how to report them on your 2020 taxes.

How do emergency retirement distributions for COVID-19 work?

When you take money out of your tax-deferred retirement account before you hit retirement age, you typically have to pay both tax and a 10% penalty for the early distribution. With Coronavirus relief distributions, you don’t have to worry about the penalty, but you will still need to pay taxes on that distribution.

Can I spread out the taxes I owe on retirement account distributions for Coronavirus?

Absolutely! It’s not required, but you can choose to report the distribution and pay the tax over three years, even if you take and use the entire distribution in one year.

Here’s an example: Say you need $15,000 from your retirement account to help you get through a job loss. Instead of owing taxes on that full amount right away, you can pay taxes on $5,000 in the first year, $5,000 in the second, and the last $5,000 in the third.

Can I reduce the amount of taxes I owe on the distribution by repaying what I pulled out over time?

For sure—repayments made prior to filing your return, but not after the tax deadline (including extensions), will reduce the taxable distribution reported.

Going back to our example above, if you put $2,500 back into your retirement account in January of 2021 and then file your taxes in February 2021, your taxable distribution on your 2020 return would be $2,500 instead of $5,000. If you pay back the entire $15,000 amount within the three-year period (before you file your 2022 return), you can file amended returns to get a refund for any taxes you paid on those distributions in 2020 and 2021.

If you are fortunate enough and are able to repay the entire distribution before you file your 2020 taxes, you’ll avoid having to pay any taxes on the distribution.

How much can I take out of my retirement account for COVID-19 relief?

You can take whatever distribution amount you need, but bear in mind that if you take out more than $100,000—the threshold for a COVID-19 related penalty-free withdrawal—the 10% early distribution penalty will kick back in on the amount above the $100,000. You may also need to file Form 5329 at that point, so it’s best to keep it under $100,000 if possible.

How do I report my emergency retirement distribution on my taxes?

Use Form 8915-E to report your COVID-19 emergency distributions. If you choose to spread your taxes out over the three-year period, we anticipate that you’ll use Form 8915-F and -G in the two upcoming years to report your taxes owed on the distribution in that year (2021 and 2022 respectively).

To fill out Form 8915-E, you’ll report your total distributions received during the year, the Coronavirus-related distributions received during the year, and the date the first distribution was received. You’ll also report any repayments made during the tax year, and you can choose whether you want to spread out the tax over three years.

Be aware of the type of retirement account you have when you fill out Form 8915-E—there are separate sections for IRAs and employer-sponsored retirement plans like a 401(k).

Can I get other tax benefits for emergency distributions for Coronavirus?

If you are thinking about capital gains treatment, unfortunately, no—COVID-19 distributions reported on Form 8915-E can’t count toward the 20% Capital Gain Election or the 10-Year Tax Option on Form 4972, Tax on Lump-Sum Distributions.

What if I don’t usually file a tax return—can I still get penalty-free emergency retirement distributions?

Yes, you can. If you need to report COVID distributions but don’t usually file taxes, simply fill out Form 8915-E with your address information, sign it, and send it to the IRS by the tax deadline.

We’re ready to help you get your 2020 taxes done!

Now that you know how to report your emergency distributions, let’s get your taxes underway—keeping the process as simple as possible is our number one goal, even with more complex situations. Be sure to sign up or log in to get started today!

Sign up for more of this.

Subscribe to our blog for year–round finance strategies and tax tips. We’re here to remove the dread from filing taxes.

Thank you! Your submission has been received!
Oops! Something went wrong while submitting the form.
Please complete the reCaptcha.

It’s not too good to be true. See what others are saying.