Took a Coronavirus Withdrawal From Your Retirement Plan in 2020? Time May Be Running Out to Repay It and Save on Taxes

In 2020, many people found themselves in a tough financial spot. Unemployment soared in April that year in the wake of the COVID-19 crisis, and many people who were out of work couldn’t return to a job due to health-related concerns.

Lawmakers had to act quickly to prevent a full-blown financial crisis. Not only did they boost unemployment benefits and approve stimulus checks, but they also made it possible for savers to tap their retirement plans penalty-free to cope with the economic blow of the pandemic.

Under the CARES Act, which was passed in March 2020, savers could take a withdrawal of up to $100,000 from an IRA or 401(k) plan without penalty. Usually, a 10% early withdrawal penalty applies when funds are removed prior to age 59 1/2.

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But while those withdrawals weren’t subject to penalties, they were subject to taxes. However, savers were also told that if they repaid their withdrawals within three years of taking them, they could get their taxes back.

At this point, though, the window to repay that money may be shrinking for some people. So if you took an IRA or 401(k) withdrawal in 2020 and you’re able to put that money back, it pays to get moving.

Why get stuck with unnecessary taxes?

The fact that lawmakers waived the 10% early-withdrawal penalty for early IRA or 401(k) distributions was a lifeline for many cash-strapped Americans in 2020. But if you took money out of your retirement plan back then to cope with added expenses or unemployment, it may be that your financial situation looks very different now. And if you’re able to repay the money you removed within three years of your withdrawal, you can recoup the taxes you paid on it.

Now, for some people, that three-year window may already be over. Remember, the CARES Act was signed into law in March 2020. It’s conceivable that many people who took money out of their IRAs or 401(k)s rushed to do so immediately once that option became available.

But some people may not have taken a withdrawal right away — either because they were exploring other options or because it took some time for IRA and 401(k) plan administrators to facilitate those penalty-free distributions. So if you removed, say, $15,000 from your 401(k) plan on June 15, 2020, and you now have that money sitting in your bank account, it could pay to put those funds back into your 401(k). That way, you can claim back the taxes you paid on that distribution.

Put your money to work

Recouping taxes isn’t the only good reason to repay your coronavirus retirement plan withdrawal. The reality is that once that money is back in your IRA or 401(k), it has the potential to grow.

Let’s say you’re 47 years old and don’t intend to retire for another 20 years. Let’s also imagine you’re able to put $15,000 back into your retirement plan. If your investments in that plan generate an average annual 8% return, which is a bit below the stock market’s average, that $15,000 will turn into about $70,000. That’s a helpful sum to have on hand for your senior years.

Of course, some people are struggling financially right now due to inflation. So if you took a withdrawal from your retirement plan in 2020, you may not be in a position to repay that money anytime soon. But if you are able to put back the funds you removed, you might benefit financially — in more ways than one.