If you pulled money from your 401(k) plan or individual retirement account last year to get through tough times, now is the time to consider next steps.

The federal CARES Act that was passed in March 2020 put in place very favorable terms for qualified retirement plan participants under the age of 59½ to tap their nest eggs without incurring the usual 10 percent penalty. Plan participants could withdraw up to $ 100,000 from their accounts and recognize it in income over a three-year period for tax purposes. They were also given three years to replace the withdrawn money to the account without any penalties or taxes owed.

“My first advice is don’t withdraw money from your retirement plan,” said Mark Luscombe, principal federal tax analyst for Wolters Kluwer Tax & Accounting. “If you have made a withdrawal, however, pay it back if you can.

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“Tax-deferred savings is the goal,” he said.

With tax season approaching, the millions of Americans who made plan withdrawals have some decisions to make.

The first step is to determine if your withdrawal is legitimately coronavirus-related and eligible for the favorable treatment under the CARES Act. The easier access to retirement funds was intended for Americans who either contracted Covid-19, had a spouse or household member who did or who experienced financial hardship due to the pandemic through a job loss, furlough or reduced hours. It also covered parents required to undertake childcare themselves because of the coronavirus.

The IRS in June significantly expanded eligibility to include people who had a new job offer delayed or rescinded and anyone who had a spouse or household member who experienced financial hardship due to the virus. In other words, just about everyone is likely eligible.

“Under the IRS-expanded criteria, most people meet the requirements,” Luscombe said. “As long as they or someone in their household was negatively affected by Covid-19, they qualify.”

As is usually the case, employer-sponsored plans must approve the distribution as coronavirus-related and some may have mistakenly withheld the customary 10 percent withdrawal penalty prior to the IRS guidance. Check with your human resources representative to determine if that was the case and have the penalty refunded to your account.

The CARES Act rules for 2020 plan withdrawals — they do not apply for this year — give participants three years to pay the withdrawal back to the plan without any tax consequences compared to the usual 60 days.

Every tax advisor and investment counselor will tell you that you’re much better off repaying the money and taking full advantage of tax-deferred savings if you can. The sooner the better.

“It obviously depends on each person’s age and financial situation but if things are looking up, pay it back if you can,” Luscombe said.

The 10% penalty for the withdrawal is waived regardless of whether you replace the money. That’s one reason Luscombe worries that many people may not return the money.

“Statistics show that people are not very good at this kind of thing,” he said, citing the difficulties employers still have getting employees to participate in retirement plans. “They start off with good intentions but then they find that they don’t have the money to replace it.”

Whether or not you plan to replace the money withdrawn from your retirement account within three years, you should pay taxes on at least one-third of the distribution this year.

The rules give you three years to spread the income out for tax purposes, but you will be liable for taxes on the withdrawal on a ratable three-year basis. In other words, if you don’t pay taxes on at least a third of the money this year, you will have to pay it later along with potential penalties for late payment.

Taxpayers can recognize all of the distribution in 2020 for tax purposes if their income (and marginal tax rate) has been substantially reduced. In either case, if you do replace the withdrawal within the three year period, you can get any taxes previously paid refunded.

“Pay the taxes unless you’re very confident you can repay [the withdrawal],” said Luscombe. “You can always amend tax returns and get it back.”