If You Withdrew Money From Your IRA During Covid, It Can Pay to Repay It

Those who made such a withdrawal under the 2020 Cares Act from their individual retirement accounts or workplace plan—401(k)s, 403(b)s or 457(b)s—and who repay all or part of it can get a full refund on whatever income tax was levied on the withdrawal.

Many people needed financial relief at the start of the pandemic because they were laid off, closed their businesses or for other reasons. The Cares Act made an exception to the government’s policy of discouraging early invasions of retirement accounts by creating Coronavirus-Related Distributions, or CRDs, and imposing no restrictions on how the distributed funds could be used.

“If you have the money, it does make sense to repay your CRD,” says Ian Berger, an IRA analyst at Ed Slott & Co., a tax consulting firm in Rockville Centre, N.Y. “That way your retirement account will be fully restored.”

CRDs were made available in 2020 to qualified individuals with certain health or financial issues who thought it necessary to reach into their retirement accounts. If you, a spouse or dependent contracted Covid or if you experienced certain adverse financial consequences related to Covid, you could take up to $100,000 from your account.

Two ways to pay

While the CRD had to be withdrawn in 2020 and reported on IRS Form 1099-R, Congress eased the pain by providing two ways to pay the tax due: Include the entire amount as taxable income in 2020, or spread the amount equally over a three-year period—2020, 2021 and 2022. Spreading was the more popular option because it more often opened the possibility of paying lower taxes. Anyone under age 59½ would also be exempt from the 10% early-distribution penalty that would otherwise be required.

Those choosing to repay, however, have to do so within three years after the funds were received, beginning with the day after you got the money. If you took a CRD on May 15, 2020, you have until May 16, 2023 to recontribute the distribution.

Such a recontribution is considered either a direct rollover or a trustee-to-trustee transfer—and is therefore not a taxable event. And the once-per-year rollover limitation doesn’t apply to this one. The repayment, moreover, wouldn’t count toward the contribution limits in effect for any plan.

For example, if you made a CRD in 2020, included the entire amount as income that year and decide to repay it before the deadline, you would amend your 2020 tax return and attach IRS Form 8915-E to claim the refund. In doing so, not only would your tax be less but it might also drop your 2020 income into a lower bracket.

Not for everyone

If you repay a CRD, the funds will resume their tax-deferred growth until your retirement. Of course, repayment isn’t always the best choice for everyone; some people may have preferred to put the funds in an easily accessible “rainy day” account to shore up emergency reserves.

Repayments of a CRD don’t have to be made to the retirement account where it originated. After all, you may no longer have that IRA or you may have changed jobs and no longer participate in that company’s 401(k). So money taken from an IRA can be returned to another IRA or money taken from a 401(k) can be returned to an IRA.