The CARES Act has brought about several relief measures created to alleviate the financial stress that the world-wide pandemic has caused taxpayers. One measure allowed for qualifying persons to take "coronavirus-related distributions" from their retirement plans. These deductions would be allowed to be taken tax-free.
The big question is? Who can qualify to take these tax-free "coronavirus-related distributions? The typical rules regarding an early withdrawal from an eligible retirement plan or IRA state that the distribution will be subject to a 10% fee for early withdrawal if it is made before the age of 59.5. This does not include the income taxes that will also need to be paid at the end of the year.
There are some exceptions to the traditional rules regarding the early withdrawal of funds. The 10% penalty will be waived if the person withdrawing has become permanently disabled. The money can also be removed without penalty for both medical costs as well as the costs for higher education.
Under the CARES Act, another exemption was added for coronavirus-related distributions." Under the exception, one can withdraw up to $100,000 between January 1 and December 30th of 2020, without incurring the 10% penalty, even if they are under the age of 59 1/2, from a qualified retirement plan or IRA. The new Act also allows the coronavirus-related distribution to be included in income in installments over a three-year period. You will also have three years to pay it back to your IRA or retirement plan, making it a tax-free rollover.
Under Notice 2020-50 from the IRS, a qualified individual is a person who has tested positive for COVID-19 or who has a dependent or spouse who has tested positive the virus. Qualification requires a positive test that is authorized unto the Federal Food, Drug, and Cosmetic Act.
A person may also qualify is they have experienced adverse financial consequences that have occurred as the result of certain events. To qualify under the portion of the exception an individual, their spouse, of someone living in their household, must have been furloughed or laid off from their job, quarantined, or saw a reduction in work hours drastically reduced as a result of COVID-19. Other qualifying factors include:
With so many people directly affected by the COVID-19 pandemic many, but not all people will be able to take needed funds out of their qualifying retirement plan or IRA without penalty. Always be sure to keep records that can prove your qualification, in the event the distribution is questioned. Also, if you are looking to avoid tax on the withdrawal completely, you will need to make sure you recontribute it back to the policy before the three-year window or you will be responsible for the income tax portion on the amount that has not been returned, but you will still be exempt from the 10% withdrawal penalty. It is important to remember that all situations are unique and may have additional restrictions or rules. To learn more about whether your distribution will qualify as coronavirus-related or if you need clarity on how these provisions in the CARES Act may affect your taxes, contact us today.