Did the Coronavirus pandemic cause you to take a distribution from a retirement plan? If so, we have good news. You have the option to recontribute those funds within three years of the distribution date.
According to the IRS, you have the ability to recontribute all or part of certain coronavirus-related distributions to an eligible retirement plan (including an IRA) within three years. This time period begins on the day after the date you received the distribution.
Here’s how it works.
Repayments will be treated as though they were eligible direct rollovers. You’ll be able to re-pay the total amount and it will be handled like you repaid it in a direct trustee-to-trustee transfer.
In investment terms, this simply means that the re-payment will be viewed as if it were seamlessly moving from one retirement account to another. This will keep you from owing federal income tax on the distribution. Also, amounts repaid aren’t subject to any contribution or rollover limits.
On top of that, you can claim a refund for any income taxes you paid on amounts previously included in income as long as they were repaid within the three-year time limit.
For example, if you took a $20,000 qualified distribution in 2020, that will be considered income for 2020 and you will pay income taxes on that amount. However, if you repay the $20,000 in 2021 (or within 3 years of receiving the funds), you can amend your 2020 tax return to remove that $20,000 of income.
Note: Only coronavirus-related distributions that are eligible for tax-free rollover treatment under Section 402(c), 403(a)(4), 403(b)(8), 408(d)(3), or 457(e)(16) may be recontributed.
Your workplace retirement plan administrator will accept your certification that you satisfy the conditions to qualify for this type of recontribution from a coronavirus-related distribution unless they have actual knowledge to the contrary.
For example, any coronavirus-related distribution from a workplace retirement plan or IRA paid to a qualified individual as a beneficiary of an employee or IRA owner – other than the surviving spouse of the employee or IRA owner – is not eligible to be repaid.
Normally, hardship distributions are not eligible rollover distributions. That’s why this new repayment option is such great news. If your hardship distribution meets requirements to be a coronavirus-related distribution, you can recontribute it.
This is only one of several new provisions related to coronavirus distributions—your tax professional can help you determine if any of the provisions pertain to you.
Important: If you decide to recontribute any distribution, please notify your tax preparer. There are no year-end tax forms issued that would alert your tax preparer that the distribution was repaid.
Have questions? We can help!