Repaying a CRD

Wednesday, July 20, 2022

By Sarah Brenner, JD
Director of Retirement Education
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Back in 2020 when COVID first became our new reality, Congress enacted the CARES Act. The CARES Act allowed qualified individuals who were affected by COVID to take penalty-free distributions from their retirement accounts of up to $100,000. The taxation on these distributions could have been paid in 2020 or spread over three years.

These distributions are called coronavirus related distributions (CRDs) and they were only allowed in 2020. However, CRDs can still be repaid to eligible retirement accounts. Recently, we have received some questions about how repayment of a CRD works. Here is what you should keep in mind if you are considering repaying a CRD.

If you took a CRD, you may repay the withdrawals within three years to a retirement account, tax-free. The three-year period begins on the day after the date the funds were received. You can make one or more repayments during the three years. Repayments cannot exceed the amount that was distributed.

The repayments can be made to any retirement plan to which the original distribution could have been rolled over. Repayment does not have to be made to the account from which the CRD originated. This is an important point to keep in mind because many individuals may no longer have the retirement account from which the CRD came. For example, they may have changed jobs and no longer participate in the plan from which they received the CRD.

The repayment will be considered a direct rollover between a plan and an IRA, and a trustee-to-trustee transfer between IRAs. As such, no taxable event is considered to have occurred when CRDs are repaid, and the once-per-year rollover rule will not apply.

If you recontribute a CRD, you are able to file an amended tax return to recover the taxes paid.

Example: Juan had COVID in 2020 and lost his job. He took a CRD of $100,000 on September 8, 2020, from his 401(k). He elected to pay taxes due on the CRD in 2020 instead of spreading the income over three years. In 2022, Juan has a new job. He decides to repay the CRD to his IRA. He will need to file an amended return to recover the taxes he paid in 2020.

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