How to handle taxes on Covid withdrawals from retirement accounts

bymuratdeniz | iStock | Getty Images

That early withdrawal from your retirement account last year may have been a life saver. Now, it’s time to start paying the taxman.

Most retirement savers did not take a distribution under legislation that authorized penalty-free early withdrawals amid the pandemic.

However, for those who did, the majority (69%) say they either don’t plan to replace any of the money they withdrew or are unable to do so, according to recent research from Principal Financial Group. Another 18% intend to repay part of their withdrawal, and 13% say they’ll replace the full amount.

Be aware that you’re required to include at least a portion of any taxes owed on your 2020 return — which is due May 17. And depending on the tax form you received, extra steps may be required to ensure you pay no penalty.

“Probably the most challenging thing will be how the distribution was reported, and making sure you get the benefit and are not penalized,” said April Walker, lead manager for tax practice & ethics for the American Institute of CPAs.

The CARES Act, signed into law last March by then-President Donald Trump, allowed individuals to withdraw up to $100,000 from their retirement account without paying the usual 10% tax penalty if they were under age 59½ — as long as the justification for the distribution was Covid-related.

Those reasons could include things like you or your spouse being diagnosed with Covid, getting laid off from your job or working fewer hours.

The rules

The forms

2020 RMDs may qualify

Source link

Share with your friends!

Products You May Like

Leave a Reply

Your email address will not be published. Required fields are marked *

Get The Latest Investing Tips
Straight to your inbox

Subscribe to our mailing list and get interesting stuff and updates to your email inbox.