The COVID-19 pandemic has resulted in high unemployment rates and left many households struggling to make ends meet. Under normal circumstances one would be advised to avoid accessing retirement account funds early. However, with the extra $600-a-week unemployment benefit set to expire at the end of the July and failure of Congress to reach an agreement on a second stimulus package, many are left with no other alternative.
If you are under the age of 591/2 and are considering a withdrawal from your retirement account as a result of financial hardship due to COVID-19, here is what you need to know:
- The CARES Act temporarily waives the 10% penalty on early distributions from an IRA, 401(k) or 403(b) retirement account up $100,000.
- The 20% tax withholding requirement is waived, instead plan participants are given up to three years to pay taxes owed on the withdrawn amount.
- The above waivers apply only to hardship withdrawals made in 2020.
Individuals qualified to take an early withdrawal are those who:
- Have tested positive and been diagnosed with COVID-19;
- Have a dependent or spouse who has tested positive and been diagnosed with COVID-19; or
- Experiences financial hardship due to them, their spouse or a member of their household:
– Being quarantined, furloughed or laid off or having reduced work hours.
– Being unable to work due to lack of childcare.
– Closing or reducing hours of a business that they own or operate.
– Having pay or self-employment income reduced.
– Having a job offer rescinded or start date for a job delayed.
In addition to the foregoing, the CARES Act has also increased the amount qualified individuals are able to borrow from an eligible retirement plan. Through September 22, 2020, individuals can borrow up to $100,000 of their account amount, up from the $50,000 amount allowed under normal circumstances. In addition, payments on both new and existing loans due through December 31, 2020 can be deferred for one year.
For additional details about how the CARES Act rules for coronavirus-related distributions and loans from retirement plans apply, see IRS Notice 2020-50. This relief as well as other information related to the effects of COVID-19 on federal income tax can be found on the Coronavirus Tax Relief pages of IRS.gov.