17 Nov How do I claim a retirement plan withdrawal on my taxes?

Q. Earlier this year when I retired at age 57 from a government job, I transferred my retirement money account from Metlife to Vanguard. It was $100,000 and there was an automatic withdrawal of 20% for federal taxes. I got a check for $80,000. When I do my income taxes next year, do I claim the full $100,000 or $80,000 as my income?
— Tax unsure

A. Let’s make sure of something here.

If you did this as a rollover, there should have been no taxes owed. But if you withdrew the money, it’s a different story.

In an ordinary or non-COVID tax year, the answer would be straightforward and pretty simple.

Assuming you placed your retirement distribution into a taxable account at Vanguard and you didn’t roll over any of the money to an IRA, you should report $100,000 of ordinary income during the current tax year, said Michael Maye, a certified financial planner and certified public accountant with MJM Financial in Gillette.

You would also be credited with a $20,000 federal tax payment or withholding on your return.

But because you are under 59 ½ years old, a 10% early withdrawal penalty might apply, he said.

There are some exceptions for government workers when it comes to the 10% early withdrawal penalty, Maye said.

“Exceptions for government workers to the 10% early withdrawal penalty include 457(b) plans as well as for certain public safety employees,” Maye said.

The definition of public safety employees was also expanded for distributions made after Dec. 15, 2015.

Per the IRS: “Effective for distributions after December 31, 2015, the exception for public safety employees who are age 50 or over is expanded to include specified federal law enforcement officers, customs and border protection officers, federal firefighters and air traffic controllers. Also, the restriction that only defined benefit plans qualify for the exemption is eliminated. Thus, an exemption is allowed for distributions from defined contribution plans or other types of governmental plans, such as the TSP.”

Maye said if you rolled the $80,000 via an indirect rollover to a Vanguard IRA ,then only $20,000 would be taxable, plus, you’d get credit for the $20,000 that was withheld for your 2020 tax return.

But as we all know, these are not normal times because of the coronavirus crisis, and there are some potential tax breaks if your withdrawal was coronavirus-related.

“For example, coronavirus-related distributions up to $100,000 can be ratably included in income over the next three tax years (2020-2022),” he said. “Also, coronavirus-related distributions are also not subject to the 10% early withdrawal penalty.”

The IRS is also allowing coronavirus-related distributions be paid back within three years, Maye said.

Per the IRS: “You may repay all or part of the amount of a coronavirus-related distribution to an eligible retirement plan, provided that you complete the repayment within three years after the date that the distribution was received. If you repay a coronavirus-related distribution, the distribution will be treated as though it were repaid in a direct trustee-to-trustee transfer so that you do not owe federal income tax on the distribution. If, for example, you receive a coronavirus-related distribution in 2020, you choose to include the distribution amount in income over a 3-year period (2020, 2021, and 2022), and you choose to repay the full amount to an eligible retirement plan in 2022, you may file amended federal income tax returns for 2020 and 2021 to claim a refund of the tax attributable to the amount of the distribution that you included in income for those years, and you will not be required to include any amount in income in 2022.”

Maye recommends you hire a tax professional to assist you with this year’s tax return just to make sure you take full advantage of any tax relief that you might be entitled to.

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This story was originally published on Nov. 17, 2020.

NJMoneyHelp.com presents certain general financial planning principles and advice, but should never be viewed as a substitute for obtaining advice from a personal professional advisor who understands your unique individual circumstances.