Among the many opportunities for relief provided by the “Coronavirus Aid, Relief, and Economic Security Act” (“CARES Act”), certain individuals that have been affected by COVID-19 may be eligible for penalty free “coronavirus related distributions” from their qualified retirement accounts or Individual Retirement Accounts (“IRAs”) during 2020.
If an individual is deemed to have been “affected by COVID-19” he or she may withdraw up to the lesser of $100,000.00 or 100% of his or her vested interest in a qualified retirement account or IRA between January 1, 2020 and December 31, 2020 without incurring the normal 10% penalty on early distributions. The individual is still responsible for income taxes due on such distributed amounts that are not recontributed to the retirement account or IRA from which they came within three years from the date of such withdrawal. The good news regarding the payment of this income tax is that even if the individual does not recontribute such withdrawals within three years, the income taxes due may be spread out and paid over those three years. If the individual wishes to wait until year three to decide on keeping or recontributing the distributed funds, he or she may amend the previous two years tax returns if it would be beneficial.
As provided in the CARES Act, an individual is deemed to have been affected by COVID-19 if he or she (a) has been diagnosed with COVID-19; (b) has a spouse or dependent who has been diagnosed with COVID-19; (c) experienced adverse financial consequences as a result of being quarantined, furloughed, being laid off, or having work hours reduced because of COVID-19; (d) is unable to work because of lack of childcare as a result of COVID-19; (e) owns a business that has closed or operates under reduced hours because of COVID-19; or (f) meets some factors determined by the IRS. This is important to note (even though there may be some ambiguity in the definition) as this relief in this provision of the CARES Act is different than many other provisions provided therein. For example, the suspension of Minimum Required Distributions from qualified retirement accounts or IRAs for 2020 is available to everyone, not just those “affected by COVID-19.”
While taking early distributions from a retirement account may not always be the wisest decision under normal circumstances, this provision in the CARES Act allows for an important safety net for those in need that have been adversely affected by COVID-19.
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