Q.: Hi Dan. I withdrew $30,000 from my IRA due to Covid in 2020. My understanding was that I could put that back and get a refund of taxes paid. How do I do this?
–Syd to Jackson, miss.
A.: Hi Syd. One of the temporary provisions that was put into effect only for 2020 was a Covid-Related Distribution (CRD). This allowed people under age 59½ to access funds from IRAs and retirement accounts like 401(k)s without the usual 10% penalty that normally applies to distributions before age 59½. The rules allowed up to a total of all plans of $100,000 per affected taxpayer. If any of these funds are refunded within three years of the distribution date, the taxes paid on anything returned may be refunded. These CRD refunds do not affect your eligibility to make other rollovers or contributions.
How you go about getting this refund depends on how you accounted for CRD on Form 8915-E of your 2020 tax return. Form 8915-E is also used to account for CRD amounts returned to an account. You should discuss with your tax preparer how best to tackle accounting, but the rules are accessible via IRS Notice 2020-50.
I assume you repay all $30,000. If you elected to put the original CRD of $30,000 on your 2020 return, you must amend your 2020 return to reflect $30,000 less income for that year.
If you used the default method that spreads income evenly over three tax years, you would only have reported $10,000 on your 2020 return, $10,000 would be reported on your 2021 return, and $10,000 would be reported on your 2022 return.
To get your refund, you must file an amended 2020 return by deleting the CRD of $10,000 reported and amend your 2021 return in the same way if you have already filed it. If you haven’t filed your 2021 return yet, you simply won’t be reporting the $10,000 income when you do. Similarly, you will not report CRD income on your 2022 return.
Now, if you are only repaying $15,000 of the CRD, the process is a little different. If you were to make this refund before filing your 2021 tax return, you would not report the $10,000 on your 2021 tax return, even if the refund was made in 2022. The additional $5,000 can be used to offset the $10,000 you will report on your 2022 tax return, or you can amend your 2020 return and adjust the income down $5,000.
If the $15,000 was repaid after you filed your 2021 return, you will not report the $10,000 you had to report on your 2022 return. The excess $5,000 can be carried forward and used to adjust lowers income depending on your choice of your 2020 return, your 2021 return, or both.
If at the three-year term to repay the CRD, you can repay more of the remaining $15,000, you would do a similar calculation.
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Dan Moisand is a Financial Planner at Moisand Fitzgerald Tamayo serving clients nationwide but with offices in Orlando, Melbourne and Tampa Florida. His comments are for informational purposes only and cannot replace personalized advice. Consult your advisor to find out what is best for you. Some questions are edited for brevity.