Tax Refund Deadline for ‘Forgotten’ COVID-Era 401(k) and IRA Withdrawals Is Looming

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The idea of taking an early distribution or loan against an employer-supported plan may seem like an appealing option, but for plan participants who chose to take advantage of CARES Act relief during the pandemic, the clock is ticking to claim special tax benefits afforded to these distributions.

The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) — passed in March 2020 to provide emergency assistance and coronavirus pandemic health care response — allowed plan members to take up to $100,000 in distributions from an employer-sponsored retirement plan without paying a 10% early distribution penalty.

The Clock Is Ticking

These coronavirus related distributions (CRDs) were only allowed in 2020, and the taxation on them could have been paid in full in 2020 or spread over three years. So, with 2023 upon us, the repayment or taxability deadline tied to the relief will soon draw to a close, whether participants realize it or not.

“I’d think the majority of the distributions were taken right around this time through the end of [2020],” said Fort Lauderdale-based financial planner Sean Deviney. “People have completely forgotten about it. Most people forgot about what they did last week, let alone three years ago.”

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As CNBC reported, data indicates that hundreds of thousands of Americans took out CRD withdrawals, but only a minority of those have repaid them. According to the Vanguard Group, around 6% of the investment advisor’s group members — approximately 268,000 of 4.7 million retirement investors — took out CRDs in 2020. However, less than 1% had repaid them by the end of 2021.

Repaying Your CRDs

Anyone who took a CRD has to repay the withdrawals within three years, beginning on the day after the date the funds were received, to a retirement account, tax-free. You can make one or more repayments during the three years, and repayments cannot exceed the amount that was distributed. Those who repay all or part of it can get a full refund on whatever income tax was levied on the withdrawal.

And repayments don’t have to be made to the same 401(k), 403(k), 457(b) or other retirement investment plan that the distribution was taken from, according to Sarah Brenner, director of retirement education at “America’s IRA Experts” Ed Slott & Co. Investors may no longer have the account or the job that funded the retirement plan.

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“The repayments can be made to any retirement plan to which the original distribution could have been rolled over,” wrote Brenner in a Slott Report. “Repayment does not have to be made to the account from which the CRD originated.”

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