Question: Aaron is 25 and serves as a member of the Army Reserve. He was ordered to active duty for 190 days. One month after being ordered to active duty, he took a distribution of $10,000 from his 401(k) retirement plan. The distribution was entirely allocable to elective deferrals, and Aaron met all of the requirements to take the qualified reservist exception to the 10% early distribution penalty. One year after his active-duty period ended, he decided he wanted to put the $10,000 back into his retirement account. Can Aaron repay the distribution, or will it be considered a new contribution into his account?
Answer: Yes, Aaron can repay the qualified reservist distribution. Although the distribution was originally from his 401(k) plan, he should make the repayment to an individual retirement plan such as an IRA or individual retirement annuity. To qualify, the repayment must be made within the two-year period beginning on the day after his active-duty period ends. He is not required to make a lump-sum repayment, but his repayment cannot exceed the original distribution amount and is nondeductible. It is also not included when determining his allowable IRA contribution for the year; meaning he can also still make a full IRA contribution as long as he otherwise qualifies to do so [IRC Sec. 72(t)(2)(G)(ii)].
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Information included in this article is accurate as of the publish date. This post is not reflective of tax law changes or IRS guidance that may have occurred after the date of publishing. All taxpayer circumstances are different, and NATP recommends contacting research services if you have specific questions about your clients’ tax situations.