If you or anyone you know withdrew funds from retirement accounts during the early stages of the COVID-19 pandemic, it’s important to be aware of a time-sensitive deadline to pay back those amounts and unlock significant tax advantages. In March 2020, Congress passed the CARES Act, which allowed individuals to withdraw up to $100,000 from their retirement accounts, such as IRAs and 401(k) plans. These withdrawals, known as coronavirus-related distributions (CRDs), were intended to act as loans and provide financial support during the economic hardship caused by the pandemic. However, to fully benefit from the tax advantages, individuals must act quickly to repay the withdrawn funds within a specific timeframe, which is ending soon.
Under the CARES Act, individuals who took CRDs were granted several tax advantages. Firstly, the usual 10% penalty for early retirement withdrawals was waived. While income tax was still owed on CRDs, those who repaid some or all of the distribution had the opportunity to recover the paid taxes and convert the withdrawals into tax-free loans. These tax benefits were only available in 2020, making it crucial for individuals to take prompt action to maximize their savings. Those who withdrew funds had three year to repay the CRDs, starting from the day after they received the funds. So, for many people, the deadline is quickly approaching if they want to be eligible for the tax refund.
Recent data from Vanguard Group reveals that a significant number of individuals took CRDs in 2020. In fact, “approximately 6% of investors in workplace retirement plans, totaling around 268,000 people out of 4.7 million”, withdrew these funds. However, according to Vanguard’s latest data, “less than 1% of those who withdrew funds had repaid them by the end of 2021.” For those who want to capture tax benefits or re-invest those funds back into their retirement accounts, now is the time to pay it back. Those who repay part or all of their CRDs within the three-year deadline must file an amended tax return to claim a tax refund.
Given the approaching deadline and the potential for significant tax advantages, it is crucial for individuals who have taken CRDs to take prompt action. Assess your financial situation and determine if you can repay the withdrawn funds partially or in full. Seek guidance from a financial advisor or tax professional who can assist you in the repayment process and help you make informed decisions based on your specific circumstances. If you have any questions, email info@shermanwealth.com.
