CARES Act – WITHDRAWAL OF RETIREMENT FUNDS
The coronavirus pandemic has caused a significant impact on the financial situation on many American taxpayers. High unemployment and the recent end to the additional unemployment benefits provided by the CARES (Coronavirus Aid, Relief, and Economic Security Act) which provided taxpayers an additional $600 per week, has caused a cash crunch for many individuals and families.
Many taxpayers are now being forced to rely on retirement savings as a way to bridge the gap related to a loss in income and pay for household expenses.
If you’ve taken money from your retirement account due to COVID-19 what does that mean from a tax perspective? Let’s take a look.
EARLY RETIREMENT DISTRIBUTIONS
IRS regulations typically provide that any retirement distributions taken prior to the age of 59 ½ will be subject to a 10% penalty on the amount withdrawn. This is in addition to the regular income taxes that will be assessed on the distributed amount.
This rule applies to most eligible retirement plans such as 401(k)s, traditional IRAs, 403(b)s, and many others.
Exceptions are usually only made for circumstances such as the return of excess contributions, death or disability of the plan participant, and a few other situations.
RETIREMENT DISTRIBUTIONS UNDER THE CARES ACT
The Coronavirus Aid, Relief, and Economic Security Act has outlined relief provisions for taxpayers who are experiencing hardship as a result of the coronavirus pandemic.
According to the legislation, taxpayers will not be subject to the penalties ordinarily associated with early retirement plan withdrawals as long as certain provisions are met.
Under section 2202 of the CARES Act, taxpayers are allowed to withdraw up to $100,000 from eligible retirement plans. In addition, for loans made between March 27, 2020 and September 22, 2020, the eligible loan amount was increased to the lessor of the vested retirement benefit in the plan or $100,000.
For those with outstanding loans as of March 27, 2020, repayment of the loan could be delayed for up to a year.
In order to qualify for penalty-free distributions from your retirement account, you must meet the following requirements:
Business owners who are financial impacted by a closure or reduction in hours of your business
You, your spouse, or a dependent has been diagnosed with COVID-19 by a Center for Disease Control and Prevention approved test.
The coronavirus pandemic resulted in your being laid off, quarantined, or furloughed, resulting in a negative financial impact for you and your family.
You are unable to work due to the lack of available childcare as a result of coronavirus.
HOW DOES THIS IMPACT ME?
Through December 30, 2020, taxpayers may withdraw a total of up to $100,000 across all eligible retirement accounts. While the penalty for withdrawal will be waived, you will still be responsible for paying taxes on the amounts that are withdrawn.
You will however, be able to pay the associated income taxes over a three-year period during 2020, 2021, and 2022.
For those who take a loan from their retirement plans, you may choose to repay the loan over a three-year period.
The coronavirus pandemic has had an unprecedented impact on many Americans. Fortunately, there is some relief if you are experiencing financial difficulties.
For more information about coronavirus related retirement distributions or to learn more about our services, please feel free to contact us for more information.