The pandemic drags on.
Here in Massachusetts, we are taking mask-wearing seriously. Even the iconic ducklings in Boston’s Public Garden and the giant baby head outside of Boston’s Museum of Fine Arts are wearing them. (Does anyone else think the giant baby head is a little weird?)
Under the Coronavirus Aid, Relief, and Economic Security (CARES) Act, individuals impacted by coronavirus can access up to $100,000 from their retirement plans with fewer consequences than usual.
Recently, the IRS issued new guidance regarding these distributions.
Should you take a coronavirus-related distribution from your retirement accounts?
The first-and-foremost question is: “Do you need the money?”
I tell clients to view their retirement plans as a lock box. The only reason to break in prior to retirement is an emergency. “I might have to sleep in a cardboard box” type of an emergency.
Even with these favorable rules, it’s still advisable to exhaust most other resources, such as emergency funds or other easily accessible forms of savings, before tapping into your retirement accounts.
Every dollar you take from your retirement plans today means less money in retirement.
If you do decide to withdraw, the key to minimizing the downside is to only take out what’s absolutely necessary and try to pay back the amount within three years.
Coronavirus-related distributions – An overview*
- 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 IRAs, or a combination of these.
- Normally there is a 10% penalty for people under age 59½
- This penalty will be waived for distributions made in 2020.
- For employer plans there is normally a mandatory tax withholding requirement of 20%
- There will be no mandatory withholding for distributions made in 2020.
- There will be no mandatory withholding for distributions made in 2020.
- 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.
- You can elect to include all the income on the 2020 return which may make sense if your business books a loss or you are in a lower tax bracket than usual.
Qualifications for a coronavirus-related distribution
- you, your spouse, or your dependent is diagnosed with COVID-19 with a CDC-approved test;
- you experience adverse financial consequences as a result of being quarantined, being furloughed or laid off, or having work hours reduced due to COVID-19;
- you experience adverse financial consequences as a result of being unable to work due to lack of childcare due to COVID-19; or
- you experience adverse financial consequences as a result of closing or reducing your business hours due to COVID-19.
- you, your spouse, or a member of your household has a reduction in pay or self-employment income due to COVID-19;
- you, your spouse, or a member of your household has a job offer rescinded or start date for a job delayed due to COVID-19;
- your spouse or a member of your household is quarantined, is furloughed or laid off, or has work hours reduced, due to COVID-19;
- your spouse or a member of your household is unable to work due to lack of childcare due to COVID-19; or
- your spouse or a member of your household owns or operates a business that closed or reduced hours due to COVID-19.
*much of this overview is from The Tax Reduction Letter at https://bradfordtaxinstitute.com
Like all tax-related legislation this can be complicated.
If you pay back some/all of the distribution in a later year you will then need to amend prior year return(s) to get back the tax you paid.
At this point it is not clear how the reporting requirements will work. Be sure to keep good records.
As of this writing (the third week in July 2020), Congress is debating additional stimulus measures related to the pandemic.
Stay tuned!
