Early Retirement withdrawals under CARES Act-Tax Tips
With many people out of work or shut down because of Covid-19 many people are considering withdrawing from their retirement savings. On regular conditions withdrawing from an IRA account before being 59 1/2 years of age would cause a 10 percent early withdrawal penalty. Also, any emergency withdrawals from current employer-provided plans would be limited to the amount needed to meet approved hardships. But as we know these are not regular conditions we are under.
If the effects of Covid-19 and its related shutdowns have hurt your income and finances, the CARES Act could help with emergency withdrawals from tax deferred retirement accounts. Now the changes are only temporary for 2020 but are helpful to anyone needing some income from their accounts.
The CARES Act eliminated the 10 percent penalty for early withdrawals under the condition that one-third of the money will be included as “income” for taxes for each of the next three years. This is unless you elect otherwise, or you pay back what you withdrew from your accounts assuming you can do so.
The tax deferred accounts that are affected by these changes are traditional IRA’s and employer provided retirement plans such as 401k, 403b, or other defined contribution plans.
You qualify for the exemption if you, your spouse, or your dependent(s) have been tested positive for Covid-19 by a CDC approved test or if you have experienced financial hardships caused by the pandemic. Conditions consist of delayed start of a new job, being quarantined, being laid off, having a reduction in hours worked or pay, rescinded job offer, reduced self-employment income, the inability to work because of lack of child care, and any other Department of Treasury defined factors.
Once you decide to withdraw from your retirement account the most you can withdraw penalty free is $100,000 per person if you have more than $100,00 in the account. Please note that it is $100,00 per person not per account. If you withdraw from multiple accounts and the total is over $100,000 you will not be considered under the CARES Act treatment. After you have talked with your CPA and your bank/financial institution and decided to withdraw, it may take several weeks to transfer into your personal account.
If you would like to learn more or to set up a consultation call Marlies Y Hendricks CPA PLLC at either 716-694-3500 or 910-769-8730.
The above information is of a general nature only and should not be relied upon for specific situations.
