A COVID-19 qualifying distribution from your self-directed solo 401k plan processed during 2020, which is a maximum of $100,000, can be repaid tax free over 3 (three) years.
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The Start of the 3 (Three) Year Clock
The 3 (three) year period starts the next day after the solo 401k distribution was received.
Example: Ted took a $70,000 coronavirus-related distribution (CRD) from his self-directed solo 401k on February 20, 2020 and receive the check on March 1, 2020. The three year period to return the funds back to his solo 401k or to an IRA starts on Mach 2, 2020; therefore, Ted must return the funds by March 2, 2023.
The 3 (Three) Year Clock to Return the Funds Back to the Solo 401k Plan or to an IRA
While federal taxes are not required to be withheld at time of the CRD related solo 401k distribution, the federal taxes due on the distribution have to be paid back at minimum equally over 3 years or can be paid sooner. This three year period begins in 2020, the year the distribution was taken. The amount of taxes due on the distribution is based on your total earned income for the year, and distributions from solo 401k plans are taxed at earned income rates.
Example: Jane took a CRD related $90,000 solo 401k distribution on April 15, 2020. Jane can include the full $90,000 distribution as earned income for 2020, or she can spread it over a three-year period ($30,000 in income for 2020, $30,000 in income for 2021, and $30,000 in income for 2022). Per question 7 of the following IRA link https://www.irs.gov/newsroom/coronavirus-related-relief-for-retirement-plans-and-iras-questions-and-answers, See more examples in Sections 4.D, 4.E, and 4.F of Notice 2005-92
If Jane later decides to return the $90,000 distribution back to the solo 401k plan or to an IRA by the end of the 3 (three) year clock so by April 16, 2023 (assuming she originally received the the solo 401k distribution on April 15, 2020), Jane will have to file amended tax returns for all three years (2020, 2021 and 2022) to get back the taxes already paid on the solo 401k distribution.
File Amended Tax Returns
For those who return the the solo 401k funds distributed due to COVID-19 to the solo 401k or to an IRA, the participant will need to file amended Form 1040 tax returns to recover the taxes paid since the taxes due on the distribution have to be spread out at minimum over a three year period.
The amount repaid to the solo 401k or the the IRA cannot exceed the amount that was distributed.
The amount repaid to the solo 401k or the IRA will be fall under the non-taxable direct-rollover umbrella.
Not Deemed a 60 Day Rollover
The once per 12 month rollover rule does not apply.
No 10% Early Distribution Penalty to Pay Back
There is no 10% early distribution penalty for those under age 59 1/2 to pay back because the 10% early distribution is waived for COVID-19 qualifying solo 401k distributions.
Reporting the Coronavirus Related Distributions
Solo 401k participants who took coronavirus related distributions (CRDs) will report CRDs when they file their individual income tax return. In addition to the 1040 series return itself, the taxpayer will file new Form 8915-E (the 8915 series reports certain disaster-related tax events) to determine the amount of any CRD included in income for the year, and to report CRD repayments.
Age 59 1/2 QUESTION:
Don’t confuse the 10 percent early distribution penalty which is a separate tax altogether and generally applies to distributions made from IRAs and solo 401k plans before age 59 1/2 unless the IRS provides an exception. The CARES Act created such an exception by waiving the 10% early distribution penalty on coronavirus related distributions (CRD) up to $100,000.