IRS Issues Guidance About Disaster-Related Distributions From Retirement Plans
What is a disaster distribution? Learn more about reporting income from disaster-related retirement plan distributions on your tax return.
Taxpayers have questions about what disaster distributions are — and what tax-preparation software like TurboTax means when they ask about disaster distributions between 2018 and 2020.
A TurboTax expert employee clarified that disaster distributions refer to amounts withdrawn from a retirement account like a 401(k) or an IRA, adding, “This was a COVID action that was allowed without penalty and could be taxed over a three-year period, if you chose.”
As part of the Consolidated Appropriations Act in 2021, taxpayers with eligible retirement plans can take qualified disaster distributions of up to $100,000 without incurring 10-percent additional tax on early distributions, and those payments can be taxed ratably over three years and repaid within three years with those repayments “treated as eligible rollover distributions transferred back to the plan on a tax-free basis,” as the law firm Morris, Manning, & Martin, LLP explains.
What is a disaster distribution?
As the IRS said last year, a qualified disaster distribution is an amount up to $100,000 taken from an eligible retirement plan by a participant whose main home was in the federally declared disaster area.
The instructions for the 2021 Form 8915-F say that for 2021, qualified disaster distributions are “the qualified 2019 disaster distributions for the Puerto Rico Earthquakes reported on 2021 Form 8915-D or the qualified 2020 disaster distributions for qualified 2020 disasters reported on 2021 Form 8915-F (2020 disasters).”
Those instructions also includes an appendix for qualified disaster areas by year, including qualified 2020 disasters. Under the heading for Appendix B, you’ll find a table for the qualified disasters and the disaster areas and disaster period that qualify for each disaster.
These disasters include, but are not limited to, Hurricane Sally for residents of Alabama and Florida; Hurricane Zeta for residents of Alabama, Georgia, Louisiana, and Mississippi; and Tropical Storm Isaias for residents Connecticut, Delaware, Maryland, New Jersey, New York, North Carolina, and Puerto Rico; and wildfires for residents of California, Colorado, Oregon, and Washington.
Why am I asked about disaster distributions between 2018 and 2020?
Tax-preparation software like TurboTax likely asks about disaster distributions from 2018 to 2020 because the income from distributions can be reported across three years of tax returns.
The IRS instructions for the 2021 Form 8915-C, for example, specify that you must file that form in your tax returns this year if you “received in 2019 or 2020 a qualified 2018 disaster distribution that you are including in income in equal amounts over 3 years [or] you made a repayment in 2021 of a qualified 2018 disaster distribution.”
The instructions for the 2021 Form 8915-F specify that you must file that form if a qualified disaster distribution was made for you from an eligible retirement plan in 2021 for a 2020 disaster or if a qualified disaster distribution was made to you in a prior year that you’ve chosen to include in equal amounts over three years and those three years have not yet expired.
As always, consult IRS documentation or a tax professional for answers about your specific tax situation.