Coronavirus Tax-Breaks For Individuals; Details Emerge From IRS
The new Coronavirus federal aid package, the CARES Act, expands options for distributions from IRAs and qualified retirement plans.
If you've been harmed by the pandemic , and need income right now, the early withdrawal penalty on those under age 59½ is waived.
The maximum amount you can withdraw penalty-free is $100,000, but you still will be required to pay income taxes on the withdrawal. Fortunately, you have the option to spread out those tax payments over the next three years. Alternatively, you have the option to report the entire withdrawal on your 2020 federal income tax return, which may aid individuals with large capital losses.
Another special rule to help those harmed during the Coronavirus pandemic expands your ability to borrow money from your IRA or retirement plan. The amount you can borrow has been doubled from $50,000 to $100,000.
Taking a loan from an IRA, 401(k), 403(b) or other qualified retirement plan before you retire is a bad idea. Withdrawals that are never paid back are an even worse idea. It's a giant financial step backward. However, if you have no other choice, tapping your retirement savings under the new law requires careful planning and forethought. Planning to pay back a 401(k) loan requires special attention.
The favorable tax treatment is empowered under Section 2202 of the Coronavirus Aid Relief & Economic Security (CARES) Act on March 27, 2020. To qualify for a waiver of the early withdrawal penalty, according to the IRS, you must meet the following requirements:
- diagnosed with SARS-CoV-2 or COVID-19,
- spouse or dependent is diagnosed with SARS-CoV-2 or COVID-19,
- experienced adverse financial consequences as a result of being:
- laid off or having work hours reduced
- being unable to work due to lack of childcare
- closing or reducing hours of a business owned or operated
- other factors determined by the Secretary (of the Treasury)
This is a new tax law and more IRS pronouncements are anticipated interpreting these special tax rules. Making an early withdrawal or taking a loan from your IRA or retirement plan requires detailed information about your personal situation and is beyond the scope of this article. Please contact our office about how this affects you.
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