WASHINGTON — If you borrowed money from your 401(k) savings account to help during the coronavirus pandemic, tax professionals urge people not to forget to pay Uncle Sam.
For those who needed cash during the pandemic last year, the CARES Act made it easy to tap into their nest eggs early and without penalty.
Normally, borrowers would have to pay a 10% tax penalty if they pull from their 401(k) plans before retirement age.
However, the CARES Act waved that penalty in 2020 as long as the withdrawal was coronavirus-related.
“So, what that means is that you’re able to take up to $100,000 from your 401(k), and that penalty is no longer there,” Atiya S. Brown, owner of The Savvy Accountant Firm, said. “That does not mean that it’s tax-free though. The income is still taxable.”
Brown said while few people tapped into their 401(k) plans during the pandemic, those who did have options when filing taxes.
“Right now, they should be working with their tax professional to see if it is better to claim it all in the first year or if they’re going to spread it out over three years,” Brown explained.
If someone chooses the three-year option, the IRS requires them to account for at least one-third of what they took out on their 2020 tax return.
“They also have to understand that if they do pay this back, they’re able to amend their tax return. If you spread it over three years and you pay it back, you’re able to go back and amend those three years so you can claim that income,” Brown told WUSA9.
It is also important to pay close attention to the tax form for the 401(k) withdrawal to make sure it shows the distribution qualifies under the CARES Act.
Brown advised taxpayers to work with a professional tax preparer this year because everyone’s situation is different.