If you have been forced to take distributions from your retirement plan because you, your spouse or dependent has been diagnosed with the COVID-19 virus or disease, or if you have experienced adverse financial consequences as a result of being quarantined, furloughed, laid off or unable to work due to the virus or disease, there is some welcome relief. The CARES Act contains the following provisions that may prove helpful:
- To the extent you take a “coronavirus-related distribution” in 2020 of up to $100,000 from a qualified retirement plan, such as a 401(k) or IRA, you can spread the income on such distribution over a three-year period starting in 2020. For example, if you take a $30,000 coronavirus-related distribution in 2020, you will report $10,000 of income in 2020; $10,000 in 2021; and $10,000 in 2022. Spreading the income recognition over three years not only defers the time for paying the tax but may also allow the income to be taxed at lower tax rates. Taxpayers have the option of reporting all the income in 2020 should they wish to do so.
- Generally, retirement plan distributions taken prior to age 59½ are subject to a 10% penalty. However, coronavirus-related distributions will not be subject to the penalty on early distributions even if you are under age 59½.
- All or a portion of your coronavirus-related distribution can be recontributed to a qualified retirement plan within three years of the distribution. Any amount recontributed will be treated as a rollover and will not be subject to tax. For example, if you take a $30,000 coronavirus-related distribution in 2020, and recontribute $20,000 within three years, only $10,000 of the distribution will be subject to tax. To the extent you already paid tax on the recontributed amounts, you can file an amended return to recapture the excess tax paid.
- Retirement plan loan provisions were expanded for loans taken from March 27, 2020 through September 22, 2020, allowing qualified individuals to take loans of up to the lesser of 100% of their account balance or $100,000. The previous limits were 50% of the account balance or $50,000. In addition, any loan repayment that is due between March 27, 2020 and December 31, 2020 is delayed one year. Finally, the five-year repayment period on retirement plan loans will not include the period from March 27, 2020 to December 31, 2020.
While taking money from your retirement plans is generally a last resort for pre-retirees, if you have no other choice, the above provisions provide some needed relief.
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