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Retirement Weekly: I withdrew money from my IRA during Covid. How can I pay it back?

Q.: Hi Dan,

I’ll soon be 63. During Covid, I was furloughed from my job and made a withdrawal from my traditional IRA. While I’ve used some of the funds to supplement my cost of living, I would like to return the excess to my IRA. I can make a $7,000 contribution for 2021 but is there a means to return more than that to avoid the bump in income tax?

Thanks, LN

A.: LN,

Hopefully you have been back to work since being furloughed. The limit for an IRA contribution for a 63-year-old is 100% of earned income (wages or a few other items) or $7,000, whichever is less. So if you don’t work in 2021, that would not be an option. Beyond a contribution, your options depend on the year in which you took the funds.

I assume the distribution check was made payable to you. If that distribution was made in 2021, the only way to get the money back in the IRA is through a standard rollover, also known as a “60 day rollover.” Two restrictions apply to standard rollovers. These restrictions do not apply to “direct rollovers” or “trustee to trustee” rollovers in which one institution directly transfers funds to another institution.

The first restriction on a standard rollover is you only have 60 days after the distribution to redeposit funds into an IRA account, hence the moniker “60-day rollover.” This will avoid taxes only on the returned amounts. If you had any withholding done from the original distribution but only return what hit your checking account, the amount withheld will remain taxable.

The second restriction is that you are only allowed to do a 60-day rollover once in any 12-month period. If you did a 60-day rollover within 12 months before this distribution, you cannot do one now. If you are planning on doing another one within 12 months, that would not be possible if your return these funds now.

If the distribution from the IRA was made in 2020, being furloughed would allow you to qualify for a “Covid Related Distribution” (CRD). As a CRD, you have three years from the date of distribution to return funds. You do not have to return it all at once.

If the distribution was accounted for as a CRD on your 2020 return, any funds returned erase taxes attributable to the distribution. Getting your tax money back can get complex because the CRD provisions provided an option to pay all the taxes in 2020 or spread the taxable income over 2020, 2021, and 2022. I’m not going to go into the weeds about how the accounting is done here. That’s a whole other column. You should talk with your tax preparer about the best way for you to tackle the issue if applicable to you.  

If you have a question for Dan, please email him with ‘MarketWatch Q&A’ on the subject line. 

Dan Moisand is a financial planner at Moisand Fitzgerald Tamayo serving clients nationwide but with offices in Orlando, Melbourne, and Tampa Florida. His comments are for informational purposes only and are not a substitute for personalized advice. Consult your adviser about what is best for you. Some questions are edited for brevity.

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