Q.: Hi Dan. I pulled out $30,000 from my IRA due to Covid back in 2020. My understanding was I could put that back and get a refund of taxes paid. How do I do that?
–Syd in Jackson, Miss.
A.: Hi Syd. One of the temporary provisions that was put in effect just for 2020 was a Covid-related distribution (CRD). This allowed persons under age 59 ½ to access funds in IRAs and retirement accounts like 401(k)s without the usual 10% penalty that normally applies to pre-59 ½ distributions. The rules allowed up to a total from all plans of $100,000 per affected taxpayer. If any of those funds are paid back within three years of the date of distribution, the taxes paid on whatever is returned can be refunded. These CRD paybacks do not affect your eligibility to make any other rollovers or contributions.
How you go about getting that refund depends on how you accounted for the CRD on Form 8915-E of your 2020 tax return. Form 8915-E is also used to account for CRD amounts paid back into an account. You should talk with your tax preparer about the best way for you to tackle the accounting, but the rules can be accessed via IRS Notice 2020-50.
I will assume you are paying back all $30,000. If you opted to put the original $30,000 CRD on your 2020 return, you should amend your 2020 return to reflect $30,000 less in income for that year.
If you used the default method which spreads the income evenly over three tax years, you would only have reported $10,000 on your 2020 return, $10,000 would be set to be reported on your 2021 return and $10,000 would be reported on your 2022 return.
To get your refund, you would file an amended 2020 return removing the $10,000 CRD reported and amend your 2021 return similarly if you have already filed it. If you have not yet filed your 2021 return, you simply wouldn’t report the $10,000 income when you do. Likewise, you would not report the CRD income on your 2022 return.
Now, if you are only paying back $15,000 of the CRD, the process is a bit different. If you were to make that repayment before you file your 2021 tax return, you would not report the $10,000 on your 2021 return even though the repayment was made in 2022. The additional $5,000 can be used to offset the $10,000 you will report on your 2022 return, or you can amend your 2020 return and adjust the income down $5,000.
If the $15,000 were repaid after you filed your 2021 return, you would not report the $10,000 you were slated to report on your 2022 return. The excess $5,000 can be carried back and used to amend down the income on your choice of your 2020 return, your 2021 return, or both.
If by the three-year deadline to repay the CRD, you can pay back more of the remaining $15,000, you would make a similar calculation.
If you have a question for Dan, please email him with “MarketWatch Q&A” on the subject line.
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 are not a substitute for personalized advice. Consult your adviser about what is best for you. Some questions are edited for brevity.