As the economic consequences of the coronavirus unfold, you may be experiencing challenges from job disruption and market volatility. The recently passed Coronavirus Aid, Relief, and Economic Security (CARES) Act offers financial relief for individuals and families directly affected by the virus.
Let’s walk through the Temporary Waiver of Early Withdrawal Penalty for a Coronavirus-Related Distribution from Retirement Accounts
The CARES Act provides qualified individuals affected by the coronavirus with access to retirement savings that typically would be inaccessible or subject to early withdrawal penalties. If you are younger than 59½, you are ordinarily subject to a 10 percent early withdrawal penalty on top of the income tax owed on your withdrawal. But if you have experienced financial hardship related to the pandemic the Cares Act waives the 10 percent penalty for withdrawing money from IRAs and defined contribution plans, such as a 401(k) or 403(b).
Coronavirus-related distributions can be taken for the following reasons:
1. You, your spouse or dependent has been diagnosed with the coronavirus.
2. You’ve experienced adverse financial consequences as a result of being quarantined, furloughed, or laid off, or your work hours have been reduced.
3. Be aware that the 10 percent waiver only covers withdrawals up to $100,000 made on or after Jan. 1. until Dec. 31, 2020.
4. You’re unable to work because of a lack of child care.
5. You’ve had to close or reduce the hours of a business as a result of the virus.
6. You’ve been financially impacted by other factors determined by the treasury secretary.
When Will I have To Pay Taxes On Withdrawal?
To ease the tax burden, under the Cares Act you have up to three years to pay taxes on the withdrawal. You can repay all or a portion of the distribution within three years, and the repayments will not be counted toward the annual contribution limits. For 2020, the maximum contribution to a 401(k) or similar retirement plan is $19,500. If you’re 50 or older, you can also contribute an extra $6,500. The annual limit for an IRA is $6,000, with a $1,000 catch-up limit if you’re 50 or older.
Things To Consider
Individuals should check with their plan sponsors regarding the CARES Act relief and think carefully about withdrawing funds set aside for retirement. The economic impacts of the coronavirus pandemic are forcing many families to make tough financial decisions, but selling investments at a market low means you are locking in that loss rather than waiting for markets to improve. When you withdraw money from a retirement account, even without a 10 percent penalty, this can have significant impacts on your retirement savings because you lose out on the compound growth from any funds you withdraw. Absent an urgent need, investors may want to rely on emergency savings to the extent available and remain focused on long term financial goals.
Get Help Before You Act
As you can see, replacing income with a loan or distribution requires knowledge and careful consideration during these challenging times. A financial consultant can help you evaluate your options to support both your short- and long-term financial goals. At Cloud Bookkeeping, Inc, we’re here to help you navigate this period of uncertainty.
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