Here’s How to Claim a Retirement Savings Withdrawal on Your Taxes

Suppose you retire from a government job earlier this year, and you transfer your savings account to Vanguard from MetLife; you will pay a 20% federal tax. Are you now doubting if you will claim your total money devoid of taxes when you do your income taxes next year?

If we were in a non-pandemic tax year, the answer would be simple, but you need to be sure of something before you can make the right decision. If you transfer your retirement money account as a rollover, you should not owe any taxes, but you will pay tax if you withdraw the money from your account. Suppose you put your retirement distribution in a Vanguard taxable account, and you did not roll the money over to an IRA; your ordinary income should be $100,000 in the current tax year. You will also get $20,000 as withholding on return or as a federal tax payment, but if you are below 59 ½ years of age, you will pay 10% as a penalty for early withdrawal. You may be exempted from the early withdrawal penalty if you are a government worker. The 457(b) plan is an example of the federal employee exemption to the 10% early withdrawal penalty. The exemption from early withdrawal also applies to certain public safety employees.

According to the IRS: For distributions made after December 31, 2015, the exemption of public safety employees above age 50 will now include customs and border protection officers, specified federal law enforcement officers, air traffic controllers, and federal firefighters. They also eliminate the existing restriction that qualifies only defined benefit plans for the exemption. Therefore, the exemption is allowed for other retirement plans, like the TSP.

For example, if you indirectly roll over your $80,000 to a Vanguard IRA, the tax will apply to only $20,000, and you will get another $20,000 for your tax return that was withheld this year. However, due to the pandemic, withdrawals related to coronavirus may have some tax breaks. Distributions related to coronavirus are free from the early withdrawal penalty, and you can pay them back within three years.

According to the IRS: You can pay back your coronavirus-related distribution to the various retirement plans if you repay within three years that you receive the distribution. When you repay the distribution, it will be treated as if you pay back the distribution into a direct trustee-to-trustee transfer. You will not pay any tax on the distribution. If you want to take full advantage of the tax relief, you can consult a tax professional to help you with your tax return.

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