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Penalty Free Retirement Plan Withdrawals—CARE ACT 2020 Tax Year ONLY
The other day someone affected by the COVID related business slowdown asked, . . .”I have bills to pay, heard something on the news about the CARES Act allowing a penalty free (NOT TAX FREE) retirement account distribution. What is the “penalty”? Do I qualify for a penalty free distribution? How to determine the taxes on the distribution? “
Normally if an employee withdraws funds from most retirement plans before reaching age 59 and ½, there is a 10% penalty in ADDITION to any tax due–UNLESS an exception applies.
An employee can take a penalty free CARES ACT qualified retirement distribution (no additional tax penalty) if:
- They are sick with COVID OR
- Family member is sick with COVID OR
- If workplace hours or pay has been reduced because of COVID or COVID quarantine OR
- If can’t work because of lack of child care. . . AND
- Distribution is $100,000 or less and was received between January 1 and December 31, 2020.
(Self employed taxpayers can qualify for a penalty free retirement distribution too in some instances but that is outside the scope of this article).
Traditional 401k, IRAs, 457s and SIMPLE Distributions are usually fully taxable. Roth 401Ks/IRAs maybe only partially taxable. To calculate the tax on the distribution: need estimated wages, earned income (includes unemployment), Retirement distribution amount and Federal tax amount already withheld. Enter the information into the IRS tax withholding calculator at https://www.irs.gov/individuals/tax-withholding-estimator or contact your tax professional. . .
For more information see: https://www.irs.gov/newsroom/coronavirus-related-relief-for-retirement-plans-and-iras-questions-and-answers