By Theresa Cagle Fry, Senior Vice President and Manager IRAs, Retirement & Education Planning
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Did you take a retirement account distribution in 2020 due to the COVID-19 pandemic? Or take a distribution because of a federally declared disaster in your area? If you also repaid those distributions, a refund of taxes paid in previous years is available if you amend your income tax returns.
In 2020, the CARES Act permitted a special penalty-free distribution to help those directly impacted by COVID-19. If you took a coronavirus-related distribution, there were two benefits. First, you were able to spread the income tax liability over three tax years – 2020, 2021 and 2022. Second, you could repay the coronavirus-related distribution – in part or in whole – by the end of 2022.
If you paid income taxes in 2020 or 2021 for coronavirus distributions, and you repaid those distributions in 2022, you would be entitled to a refund for taxes paid.
If you reside in a federally declared disaster area and sustained economic loss, you are eligible to take a penalty-free withdrawal of up to $22,000 per disaster from your retirement accounts. Like coronavirus-related distributions, income taxes for disaster-related distributions can be spread over three years (the year of the distribution and the two following years) and you have three years to repay them. When you repay a disaster-related distribution, you no longer owe income taxes on the amount repaid and therefore would be able to receive a refund for prior taxes paid.
More Opportunities to Repay Distributions in the Future
In December 2022, Congress passed a new retirement reform package referred to as SECURE 2.0. With its passage, there will be more opportunity for specialized types of withdrawals that are not only penalty free when taken prior to age 59 ½, but also are eligible for repayment, including:
- Qualified Birth or Adoption Distributions – Repayment can be made within three years for distributions of up to $5,000 taken to cover expenses related to the birth or adoption of a child.
- Terminal Illness Distributions – Repayment can be made within three years for distributions taken in connection with the diagnosis of a terminal illness.
- Emergency Distributions – Beginning in 2024, distributions of up to $1,000 a year may be taken in connection with an unforeseen or emergency financial need. Emergency distributions can be repaid within three years. However, no other emergency withdrawals can be made during the three-year repayment period until the prior emergency distribution has been repaid in full.
- Domestic Abuse Distributions – Beginning in 2024, distributions up to $10,000 taken by victims of domestic abuse may be repaid within three years.
If a repayment situation applies to you, make sure you talk with your tax professional about amending prior income tax returns to request the refund you are entitled to.
Benjamin F. Edwards does not provide legal or tax advice, therefore it is also important to consult with your legal and tax professionals for additional guidance tailored to your specific situation.