Cares Act 401k Withdrawal Payback: What You Need to Know
Understand the key rules for repaying a CARES Act 401(k) withdrawal, including timelines, tax implications, and options for full or partial repayment.
The CARES Act allowed eligible individuals to withdraw up to $100,000 from their 401(k) in 2020 without the usual early withdrawal penalty. This provided financial relief during the pandemic but also created repayment and tax considerations.
Understanding repayment rules is essential to avoid unnecessary taxes and protect retirement savings.
Repayment Timeframes
Individuals who withdrew funds under the CARES Act had three years from the distribution date to repay the amount and avoid income tax. For 2020 withdrawals, the deadline was 2023. Unlike standard 401(k) loans, these repayments were considered rollover contributions and not subject to annual contribution limits.
If the funds were not repaid within three years, the withdrawal became taxable income. The IRS allowed taxpayers to spread the tax liability evenly over three years. For example, a $30,000 withdrawal could be reported as $10,000 in income for 2020, 2021, and 2022. If the full amount was repaid before filing the 2022 tax return, no taxes were owed. Those who repaid after reporting income could file an amended return to claim a refund.
Tax Reporting Obligations
When a CARES Act 401(k) withdrawal was made, the retirement plan provider issued IRS Form 1099-R, detailing the amount withdrawn as a coronavirus-related distribution. Taxpayers reported this on their federal return using Form 8915-E, which allowed them to spread taxable income over three years if the withdrawal was not fully repaid.
Those who repaid the withdrawal within the allowed timeframe could amend prior tax returns to recover taxes paid. This required filing Form 1040-X along with an updated Form 8915-E for each affected year. Amended returns took several months to process, delaying refunds.
State tax treatment varied. Some states followed federal guidelines, allowing the three-year income spread and repayment benefits, while others required the full amount to be reported as taxable income in the year of distribution. Taxpayers needed to check state-specific rules.
Partial vs. Full Payback Options
Deciding whether to repay a CARES Act 401(k) withdrawal in full or partially depended on financial circumstances and retirement goals. Full repayment restored savings and preserved tax-deferred growth. Since 401(k) accounts accumulate returns over time, repaying the full amount allowed funds to grow uninterrupted. Those who could afford it often prioritized full repayment to minimize long-term losses.
Others opted for partial repayment, balancing savings replenishment with other financial obligations. Some used funds for mortgage payments, medical bills, or debt repayment. A partial payback reduced the taxable portion of the withdrawal while keeping some funds available for immediate needs. Because repayment was treated as a rollover rather than a new contribution, individuals could return any portion of the withdrawal without being constrained by annual contribution limits.