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Relief for Taxpayers Taking Retirement Distributions Due to COVID 19

Typically when you make a withdrawal from a 401(k) or an IRA before the age 59 ½ you will be penalized at the rate of 10%. The Internal Revenue Service created this rule to discourage individuals from withdrawing from their retirement accounts before retirement age. So not only will you be required to pay federal and, most of the time, state taxes on the withdrawal, but you have to consider the 10% additional penalty if you are younger than 59 ½.


There are some exceptions to the 10% penalty rule, if eligible; hardship expenses that they may consider are: medical expenses, permanent disability, first time home purchase, burial and funeral expenses, and sometimes tuition and educational expenses.


This year, however, because of the Coronavirus, many individuals and families have encountered hardship and have found it necessary to tap into their retirement accounts. Thankfully, the Coronavirus Aid, Relief and Economic Security Act (CARES Act) has given some relief to these taxpayers. So here is a view of what that relief looks like.


RELIEF RULES FOR RETIREMENT ACCOUNT WITHDRAWALS


  • Individuals affected by COVID-19 can withdraw up to $100,000 from employee-sponsored retirement accounts like 401(k) s and 403(b) s, as well as personal retirement accounts, such as traditional individual retirement accounts, or a combination of these.

  • The 10% penalty will be waived for distributions made in 2020.

  • There are no mandatory withholding requirements.

  • The distribution can be taxed as income spread evenly over tax years 2020, 2021 and 2022. However, if you can pay back the amount you took out within three years, you can claim a refund on those taxes.

  • 401(k) plan participants can now take out 100% of their vested balance (previous rules limited borrowers to 50%) as a loan up to $100,000, and payments on this loan can be delayed for up to one year.


WHO IS ELIGIBLE


Well the next question that you may have is: Am I eligible? According to the IRS notice that was issued on June 19, qualified individuals include anyone who has encountered “adverse financial consequences” resulting from the COVID 19. This means that if you, a family member, or anyone in your household has any of the following listed below, then you may be eligible.

  • Been quarantined, furloughed or laid off.

  • Having hours at work cut.

  • Having a job offer rescinded or delayed or income (which includes self-employment income) reduced in any way.

  • Being unable to work because of lack of child care.

  • Shutting down a business or reducing the hours.


SHOULD YOU TAKE MONEY OUT OF RETIREMENT


This is a personal question that you will have to ask yourself. Of course my opinion is that retirement money should always be a last resort.


One of the main problems to consider this year if you pull money out is the market conditions. If you pull money out of investments, just consider that the market has fluctuated a lot this year and if you need to liquidate some investments you may take some losses.


You will also need to be mindful of the taxes. Even though you do have the three years to spread the taxes, you still need to pay the taxes on the distribution, so always consider the amount of taxes that may be owed and what tax bracket you are in.


Important note though: if you end of paying the distribution back within three years you are allowed to file for a refund of the amount of taxes that you paid on the distribution.

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