Individuals suffering financially during the current COVID-19 pandemic can avoid tax penalties by accessing their retirement savings. Typically, taxpayers who withdraw funds from a standard retirement account before age 59½ are subject to a 10% additional tax for early withdrawal, barring other qualifying circumstances. To financially survive the pandemic’s impact, the Coronavirus Aid, Relief, and Economic Security (CARES) Act permits taxpayers to make early withdrawals in 2020, which will not be subject to the 10% additional tax under Sec. 72(t) or the 25% additional tax on SIMPLE IRAs under Sec. 72(t)(6) if certain conditions are satisfied.
In order to avoid the 10% penalty, the distribution must be (1) made to a qualified individual, (2) from an eligible retirement plan, (3) between Jan. 1, 2020, and Dec. 31, 2020, and (4) $100,000 or less in aggregate.
- An early distribution is allowed when made to a qualified individual: A qualified individual includes any person who has been diagnosed with the COVID-19 virus or has suffered, in part, adversative financial consequences due to being quarantined, furloughed, or laid off; having hours or pay reduced; having been unable to work due to a lack of child care; etc. An individual also qualifies if his or her spouse or a member of his or her direct household has experienced any of the aforementioned adverse conditions.
- An early distribution is allowed when made from an eligible retirement plan: Eligible plans include an IRA, 401(k), 401(a), an annuity such as a 403(a) or 403(b), and a governmental deferred compensation plan such as a 457(b).
- An early distribution is allowed when made in the calendar year of 2020.
- An early distribution is allowed when it is $100,000 or less in aggregate: The final requirement is that the aggregate distributions eligible for COVID-19 relief are not to exceed $100,000 per individual. An individual may receive distributions from several unrelated plans which surpass $100,000 in aggregate, but the individual may only exclude up to $100,000 from the 10% additional tax.
Certain eligible distributions must be reported as income and are subject to income tax, but without additional tax or a penalty for early distribution. The CARES Act allows individuals to report distributions ratably over three years. However, qualified individuals may elect out of the three-year ratable income inclusion and instead include the entire amount in the year of the withdrawal.
Please contact HoganWillig should you have questions about retirement plan withdrawals and ratable income reporting.
DISCLAIMER: This article has been published as a service to the general public and as such, is intended for general purposes only. The information contained within this article should not be considered and/or construed as legal advice. Each reader is advised to consult legal counsel to determine how the contents of this article may apply to their particular facts and circumstances. For changing and up-to-date legal information, visit our COVID-19 Resource Center.