If So, You Can Pay It Back Now, Tax-Free; Thanks to the 2020 CARES Act
I've got a question for you. During COVID, remember when it first emerged in the spring of 2020? Back then, the Congress and the White House reacted very quickly to try to make life a little easier for people who suddenly unexpectedly lost their jobs during the immediate shutdowns that occurred. Remember all that? Of course you do. Well, let me ask you a question. Did you take advantage of one of the rules that Congress created, allowing you to withdraw money from your IRA or 401(k)? You didn't have to be 59 and a half in order to do this without penalty. This was all part of the 2020 CARES Act. There was a desperate effort to reduce the awful economic impact as a result of the shutdowns that occurred when COVID emerged.
So if you withdrew money from your IRA during COVID or your 401(k), that of course created a tax liability, not a penalty, but you still had to pay taxes on the income, the CARES Act gave you time to pay that tax. So here's the deal. If you took the money out during COVID because you needed the money to help support yourself during that terrible time, well, you know what? If you put the money back, you will get a full refund of the taxes you paid.
See, under the CARES Act, you've got three years from when you took the money out to put the money back into the account. This is really cool because you probably took the money out needing the money or fearing that you might need it. That forced you to pay a big tax liability. But now that we are past all that and with the incredible increase in the stock market since 2020, I mean, despite what's been going on this year, well, you may be in a stronger personal finance situation than you expected or had hoped back in 2020, which means maybe you've got the ability today using other savings and investments or other resources to pay back your IRA or your 401k.
Tax law lets you do it even though that was two or three years ago. And that means you'll get a tax refund of all the taxes you previously paid on that withdrawal. It's a really cool opportunity. So talk to your tax or financial advisor because the clock is ticking as we're approaching year end for you to be able to take advantage of this. And I think it could be a good idea, a good opportunity for you to lower your taxes in 2022 by taking advantage of this. And oh, by the way, at the same time, you'll be boosting the amount of money you have in retirement savings. It's a double win. So talk to your tax or financial advisor if you withdrew money from your IRA or 401(k) during COVID.