In the wake of the COVID-19 pandemic, amidst the layoffs and furloughs, many individuals have turned to withdrawing funds from their 401(k). Temporary changes to the rules under the CARES Act may give you more flexibility to make an emergency withdrawal from tax-deferred retirement accounts during 2020. Though early withdrawal penalties have been relaxed in some cases, in which you are able to withdraw money without consequences, there are several things you need to consider to avoid tax penalties on retirement withdrawals. Here are 6 important items you should know to ensure your withdrawal qualifies from the experts at CPA Accounting & Tax Services.
1. Tax-deferred accounts that are affected by the changes under the CARES Act include: 1-Traditional IRAs 2-Employer provided retirement plans such as a 401(k) or 403(b) or other types of defined contribution plans.
2. A distribution due to the Covid-19 pandemic is one that meets this criteria and is made from an eligible retirement plan to a qualified individual from January 1, 2020, to December 30, 2020.
3. To qualify for the exemption, you, your spouse, or dependent must have been diagnosed with COVID-19 by a CDC approved test and/or if the pandemic has had negative effects on your finances (i.e. you or your spouse lose your job, your co-habitant loses their job, furlough, etc.).
4. Under the CARES Act the 10 percent early withdrawal penalty if you are under the age of 59 ½ is eliminated.
5. One third of the money you withdraw will be included as income in your taxes for each of the next three years unless you elect otherwise. The CARES Act also allows you to pay back what you withdrew from your accounts if you’re able.
6. You are allowed withdrawals of up to $100,000 per person taken in 2020 to be exempt from the 10% penalty. If you have more than $100,000 in one of these retirement accounts, it is $100,000 per person and not per account. You can’t get the special tax and CARES Act treatments for amounts that you take out that are more than $100,000 total from all of your accounts.
Let us guide you through the CARES Act changes that affect you and your business. Contact the professionals at CPA Accounting & Tax Services to help guide you through tax season and beyond. We specialize in Business Accounting Services, Individual Tax Services, International Tax Services, Tax Planning and Tax Resolution Services. We have offices in Orlando, Florida and service clients worldwide. Find out how we can serve all of your accounting needs by contacting us today.