29 Oct Early Withdrawals From Retirement Accounts
Taking money from your retirement funds before age 59 1/2 is not recommended, but due to COVID lockdowns, it may be unavoidable if you need fast cash. So you don’t make it worse on yourself, read the following:
Early withdrawals from traditional and Roth IRAs are subject to an additional 10 percent tax, unless an exception applies. Exceptions to the additional 10 percent tax apply for early distributions:
- Beneficiary or estate on account of the IRA owner’s death
- Totally and permanently disabled
- Distributions made as part of a series of substantially equal periodic payments for your life (or life expectancy) or the joint lives (or joint life expectancies) of you and your designated beneficiary
- Qualified first-time homebuyer
- Qualified expenses for higher education
- Medical insurance premiums paid while unemployed
- Unreimbursed medical expenses that are not more than a certain percentage of your adjusted gross income
- Distributions due to an IRS levy of the IRA under section 6331 of the Code
- A qualified reservist distribution, or
- A qualified disaster distribution (certain rules apply)
Relief Under the CARES Act of 2020
The Coronavirus Aid, Relief, and Economic Security (CARES) Act helps eligible taxpayers in need by providing favorable tax treatment for withdrawals from retirement plans and IRAs and allowing certain retirement plans to offer expanded loan options.
Coronavirus-related withdrawals or loans can only be made to an individual (or the individual’s spouse) if they are diagnosed with the virus by a test approved by the CDC. The individual must also experience adverse financial consequences as a result of quarantine or business closure.
Under the CARES Act, individuals eligible for coronavirus-related relief may be able to withdraw up to $100,000 from IRAs or workplace retirement plans before Dec. 31, 2020, if their plans allow. In addition to IRAs, this relief applies to 401(k) plans, 403(b) plans, profit-sharing plans, and others.
Individuals who were eligible to take coronavirus-related withdrawals could borrow as much as $100,000 (up from $50,000) from a workplace retirement plan if their plan allows for it. Plan administrators can suspend, for up to one year, plan loan repayments due on or after March 27, 2020, and before January 1, 2021. A suspended loan is subject to interest and the term of the loan may be extended to account for the suspension period.
Tax Treatment of Coronavirus-related Withdrawals
The distributions generally are included in income starting with the year in which you receive your distribution, but split over 3 years.
Before withdrawing funds from a retirement account, call your employer, plan administrator, financial advisor or a tax professional. While you may be able to minimize penalty taxes using one of the exceptions above including those under the Cares Act, remember that you are still liable for any regular income tax that’s owed on the funds that you’ve withdrawn and you may be liable for more tax than you anticipated when filing future tax returns.
There are other retirement updates for 2021 too, such as IRA income eligibility. Call us or connect on social media to set up an appointment.