Time Running Out to Repay Funds Withdrawn from Retirement Accounts in 2020

Jun 20, 2023 | Blog

Near the beginning of the 2020 Covid-19 pandemic, certain investors were allowed to withdraw up to $100,000 from 401(k) plans and individual retirement accounts without the usual penalties and restrictions. The federal relief law passed in the spring of 2020 provided savers with special tax benefits regarding those withdrawals. However, any San Jose tax lawyer could confirm that as of June, 2023, many individuals now have weeks, or even mere days, to repay those funds or forfeit the benefits. 

Three-Year Repayment Window Soon to Close

Part of the federal relief package, also called the CARES Act, provided funds to cash-strapped households due to extraordinarily high unemployment rates resulting from the pandemic. Part of the Act included a break for those saving money in various types of retirement accounts. An Internal Revenue Service tax attorney explained that one benefit to owners of such accounts was a waiver of the typical tax penalty of 10 percent if money is withdrawn early from the account. Additionally, tax breaks for owners of such accounts were also written into the Act. 

The CARES Act stated that investors would be given a three-year window during which they could claim a refund for taxes paid on the early withdrawal if all or part of the distribution was repaid within three years. This essentially made the withdrawals more like tax-free loans. These benefits were only available in 2020, and now that the three-year repayment window is closing, it remains to be seen how many individuals may end up needing a back-taxes attorney

The downside of this type of benefit is that the repayment can easily slip a person’s mind. The clock began ticking the day after the funds were acquired, so most of the deadlines are looming in months, weeks, and days. A wage garnishment lawyer or an attorney who deals with complicated tax returns is probably the best individual from whom to seek advice if one has forgotten about this stipulation.

Most Distributions Taken Between June and December 2020

Florida CFP Sean Deviney stated that most individuals who withdrew money from their retirement accounts did so from June to December. Even though the CARES Act was passed in March, in most instances, it would have taken a month or two for retirement plan administrators and employers to create a system to facilitate the withdrawals.

Records suggest that hundreds of thousands of families and individuals impacted by the pandemic took such distributions if they were available, but not many have repaid the funds yet.

An Interesting Statistic 

The Vanguard Group stated that about 268,000 of the 4.7 million retirement investors for whom they manage accounts withdrew some money from their retirement programs in 2020. However, less than 1 percent had repaid it by the end of 2021. This is Vanguard’s most recent data.

Refunds Must Be Claimed Through an Amended Return

According to the IRS, investors who repay part or all of the funds by the appropriate deadline are required to file an amended tax return to claim a refund. Savers had the option to take the income-tax liability over the course of three years, but the individual would be required to file an amended return for each of those years. If, on the other hand, the same person chose to report the entire amount withdrawn on his or her 2020 tax return, it would only be necessary to submit one amended tax return.

Interestingly, investors were not required to repay the funds to the original account from which they were distributed. This is because the person may have changed jobs, or may have stopped participating in the retirement plan, particularly if it was work-sponsored. A San Jose tax lawyer should be contacted by anyone with concerns about these, or any tax related issues. Contact Us for a Tax Attorney in San Jose.