Congress passed the CARES Act on March 25, 2020, to provide immediate economic assistance to individuals, families and businesses struggling during the COVID pandemic. Among the law’s provisions was an opportunity for qualifying individuals to take penalty-free early withdrawals of as much as $100,000 from their 401(k), 403(b) and IRA retirement plans during calendar-year 2020. Individuals could also recoup the income taxes paid on those withdrawals if they repay the distributed amounts to their retirement accounts by 2023.
Under the law, individuals could treat a COVID-related retirement plan distribution as taxable income in 2020 or spread the withdrawal and related income tax liabilities equally over a three-year period. In this latter case, an individual who withdrew $30,000 in 2020 would have reported it as $10,000 in income on each of their tax returns for 2020, 2021 and 2022. However, when taxpayers repay the distributed amount to their retirement plans within three years of the distribution date, they may file amended tax returns to claim a refund for the tax already paid. The repayment would be treated for tax purposes as a rollover or a direct trustee-to-trustee transfer that is excludable from gross income.
It is critical retirement plan account owners recognize the timing of their original COVID-related withdrawals to ensure they meet the exact three-year deadline date for recontributing those amounts to their plans.
About the Author: Sean Deviney is a CFP®* professional, a retirement plan advisor and a director with Provenance Wealth Advisors (PWA), an independent financial services firm affiliated with Berkowitz Pollack Brant Advisors + CPAs. For more information, call (954) 712-8888 or email firstname.lastname@example.org.
Provenance Wealth Advisors, 515 E. Las Olas Blvd., Ft. Lauderdale, FL 33301 (954) 712-8888.
Sean Deviney is a registered representative of and offers securities through Raymond James Financial Services, Inc., Member FINRA/SIPC. Raymond James is not affiliated with and does not endorse the opinions or services of Berkowitz Pollack Brant Advisors and Accountants. PWA is not a registered broker/dealer and is independent of Raymond James Financial Services. Investment Advisory Services offered through Raymond James Financial Services Advisors, Inc., and Provenance Wealth Advisors.
This material is being provided for information purposes only and is not a complete description, nor is it a recommendation. Any opinions are those of PWA and not necessarily those of Raymond James. You should discuss any tax or legal matters with the appropriate professional. The information contained in this report has been obtained from sources considered to be reliable, but Raymond James does not guarantee that the foregoing material is accurate or complete.
401(k) plans are long-term retirement savings vehicles. Withdrawal of pre-tax contributions and/or earnings will be subject to ordinary income tax and, if taken prior to age 59 1/2, may be subject to a 10% federal tax penalty. Investments mentioned may not be suitable for all investors. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct.
Roth IRA owners must be 59½ or older and have held the IRA for five years before tax-free withdrawals are permitted. Additionally, each converted amount may be subject to its own five-year holding period. Converting a traditional IRA into a Roth IRA has tax implications. Investors should consult a tax advisor before deciding to do a conversion. Please note, changes in tax laws may occur at any time and could have a substantial impact on each person’s situation. While we are familiar with the tax provisions presented herein, as Financial Advisors of RJFS, we are not qualified to render advice on tax or legal matters. You should discuss tax or legal matters with the appropriate professional.
Posted on May 18, 2023
* Certified Financial Planner Board of Standards Inc. owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNER™ and federally registered CFP (with flame design) in the U.S., which it awards to individuals who successfully complete CFP Board’s initial and ongoing certification requirements.