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IRA Financial Blog

AdBits Episode 29 – Report a CARES ACT Distribution

AdBits Podcast

IRA Financial’s Adam Bergman Esq. explains how to report an IRA or 401(k) distribution made under the CARES Act and your options for paying taxes.

With the tax deadline approaching (it was recently moved to May 15, 2020), it’s time to consider filing your income tax. Due to the COVID-19 pandemic, leniency was giving to those who wanted to tap their retirement funds early. In this podcast, Adam Bergman discusses the CARES Act, what it allowed for retirement savers, and how to report any income that you withdraw from your IRA or 401(k) plan.

What is the CARES Act?

Back in March of 2020, then-President Trump signed into law the CARES Act. This was the first stimulus package that was passed by the US government. It help millions of Americans via stimulus checks, the popular Paycheck Protection Program for small businesses and expanded unemployment benefits.

A little known feature for many Americans was the ability to tap your retirement savings. If you were not yet age 59 1/2 and you took a withdrawal from your savings, you would be hit with a 10% early withdrawal penalty. The Act waived that fee for up to $100,000 in distributions for anyone who was directly affected by the coronavirus. In fact, most Americans have been impacted in one way or another. Therefore, if you or someone close to you contracted the disease or you financial situation was affected by it, you could tap your retirement funds early and without penalty.

Of course, you still had a tax burden you would need to settle, since the IRS always gets it cut! The Act added some leeway here as well. Instead of having to declare the entire withdrawal as income for 2020, you could spread it out over the next three years. You would divide the amount you withdraw by three, and claim that income on your 2020, 2021 and 2022 tax returns. That way, you don’t get a large tax bill all at once.

Further, if within those three years you re-contributed those funds to any retirement plan, taxes would not be due. If, in three years, you returned funds to a plan, you could amend previous returns and receive a refund of taxes you already doled out.

Reporting a Distribution

First off, it’s important to note that the CARES Act distribution allowance ended at the end of 2020. Although there have been new packages given by the government, they have yet to extend penalty-free use of retirement funds. Therefore, if you did not already take a coronavirus-related distribution, you cannot take one now. If you did, you need to tell the IRS the details.

When you file your taxes, you will need to file Form 8915-E. Please note that this podcast was recorded before the form was finalized. The IRS has finalized the form so you can file your taxes at any time. On this form, you will report either the total amount of your distribution, or one-third of the amount, which will be reported for three years. No penalty will be due on the amount withdrawn, even if you are under age 59 1/2.

This form will also be used to report any re-contributions you made to the plan. You can then amend previous returns so you can receive a refund for any taxes paid. It’s best to work with a tax professional to ensure you file your taxes correctly, especially if you took a CARES Act distribution.

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