Tax reporting on coronavirus-related retirement plan distributions

October 19, 2020
Senior man reviewing retirement distributions

You now have the option to spread the tax reporting of coronavirus-related distributions taken from your retirement plan over three years instead of all at once.

Options for reporting taxable distributions

Extending the distribution reporting equally over three years on your federal tax return may help reduce the single-year tax burden that could result from a large taxable withdrawal.

For example, if you take a $9,000 eligible distribution from a 401(k), 403(b) or a Traditional IRA in 2020, you can either report the entire amount on your 2020 tax return or report $3,000 on each of your 2020, 2021, and 2022 tax returns. Once you choose a way to report, it cannot be changed. In addition, if you’re under age 59½ and report a qualifying distribution, you will not face the usual 10% early withdrawal penalty (25% on SIMPLE IRAs) when filing your taxes.

Distribution rules change for 2020

In general, the CARES Act provides for expanded retirement plan distribution options and favorable tax treatment on up to $100,000 of coronavirus-related distributions from eligible retirement plans to qualified individuals.

The 20% mandatory federal income tax withholding is waived from qualified retirement plans. Also, distributions from a qualified retirement plan or Traditional IRA that are repaid at any time during the three-year period beginning on the day after the distribution is received will be considered a tax-free rollover.

This year’s coronavirus relief bill also allows for special rollover rules around distributions. Qualifying taxpayers have been allowed to reinvest or skip required minimum distributions from retirement plans this year.

Filing your taxes

Talk to your tax preparer, or if you prepare your own taxes, report any distributions taken or skipped in your tax software to ensure your return is prepared correctly.

Visit the IRS’ page on coronavirus-related relief for retirement plans and IRAs for additional information.

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