Forget what you’ve heard or read prior to 2020. Much of that went out the window, but just for 2020, then it all goes back to the old rules in 2021.
What am I talking about? Normally, if you take a distribution from a retirement account prior to turning 59 ½, there is a 10% tax penalty on top of the regular tax. (Sure there are some exceptions such as Disability, Medical Emergency, Paying Medical Insurance Premiums, Paying for Higher Education, and 1st Time Home Purchase. I won’t get into those at this time. Maybe another day soon.)
Well, thanks to the Congressional CARES Act passed last spring, there is now an exception just for 2020.
This applies to traditional IRA accounts as well as employer-provided retirement plans such as 401(k) or 403(b).
Basically, if you experienced either 1. You, your spouse or dependent was diagnosed with COVID-19 by an approved CDC test; or 2. You experienced adverse financial consequences as a result of certain COVID-19 related conditions (such as being laid off, having to take furlough, reduction in pay and/or hours, loss of self-employment income, closing or reduction in your business, inability to work due to lack of childcare, been forced into quarantine, etc.)…
Then, if you take an early distribution from an eligible retirement plan between Jan. 1, 2020 and Dec. 31, 2020, you can take advantage of the special tax treatment allowed by the CARES Act.
What are those special tax treatments? Well, for one, no 10% early distribution penalty. Also, you can average out the full distribution over the next three years’ tax returns. You could also put all the money back into the retirement account(s) within three years and reverse the taxable income already reported by amending your already filed tax returns within that three-year period.
Oh yes! There is one additional matter. How much can you take? Up to $100,000 per person. Anything over that is still subject to the 10% penalty.
I highly suggest you avoid taking money out of your retirement accounts, since the market is not quite back to where it was in February, you would be making it harder for your account to recover. But, sometimes, when you have a financial crisis and are out of options, then taking an early distribution from your retirement account might be enough to save the day.
Did you hear? Psalm 6:12 says, “Be gracious to me, O Lord, for I am languishing; heal me, O Lord, for my bones are troubled.”
Kelly Bullis is a Certified Public Accountant in Carson City. Contact him at 882-4459. On the web at BullisAndCo.com Also on Facebook.