Can I Make Penalty-Free Coronavirus Related IRA Withdrawals?
Posted on Tue Mar 31, 2020, on IRA Trust
From Our “Ask a Question” Mailbag: “Can I Withdraw Funds from My Retirement Account for Costs Related to Coronavirus? Are there any penalties for Coronavirus Related IRA Withdrawals?”
Estate Planning Attorneys
Can I Make Penalty-Free Coronavirus Related IRA Withdrawals?
On March 27, 2020, President Trump signed the Coronavirus Aid, Relief, and Economic
Security (CARES) Act into law. The CARES Act is an unprecedented economic stimulus plan
providing over $2 trillion in relief. That relief comes in multiple forms, including cash payments
made directly to taxpayers.
The Act and Retirement Accounts.
A lesser-known aspect of the CARES Act is the ability to withdraw money from your qualified
retirement plans before you turn 59 ½ without incurring a penalty. Generally, if you prematurely
withdraw funds from a qualified plan like an IRA or 401(k), you must pay taxes on the
distribution and suffer a 10% penalty. There are some exceptions to this rule, and the CARES
Act adds a new one: a taxpayer can take a “coronavirus related distribution” from a qualified
retirement plan of up to $100,000 in 2020 without incurring a penalty. You are still required to
pay tax on the distribution, however.
What are Coronavirus Related IRA Withdrawals?
A “coronavirus-related IRA distribution” is any distribution from a qualified retirement plan made to
an individual 1) diagnosed with SARS-CoV-2 or COVID-19 by a test approved by the Centers
for Disease Control and Prevention (CDC); 2) whose spouse or dependent is diagnosed by a
CDC-approved test; or 3) who experiences adverse financial consequences as a result of any of
the following events caused by the outbreak: quarantine, furlough, job loss, reduced working
hours, inability to work due to lack of child care, business closure, or reduction of business
hours.
Do I Have To Pay the Income Tax in 2020?
Although you still have to pay income tax on the distribution, the law allows you to spread the
income over a three-year period, starting in 2020. You can also avoid the tax completely if you
repay the distribution back into the retirement plan within three years.
How Much Can I Withdraw?
The law temporarily increases the maximum an individual can borrow from a qualified
retirement plan from $50,000 to $100,000 for the 180-day period after enactment. If you have
already reached retirement age and are required to withdraw a required minimum distribution
(RMD) from your qualified plan in 2020, the new law postpones the RMD to 2021.
Can I Make Penalty-Free Coronavirus Related IRA Withdrawals?
In sum, if you, a spouse, or a dependent have suffered adverse financial effects due to the
outbreak, the CARES Act allows you to tap into your retirement funds without incurring an early
withdrawal penalty. There are still income tax consequences, but they can be spread out over
time to lessen the blow. Of course, it’s best to keep retirement funds in their accounts until you
reach retirement age, but the CARES Act gives you the option to access additional funds to help
cope with this frightening and unpredictable time.
There is more!
Please follow this link to read a more detailed article IRAs and IRA Trusts.
In Conclusion: Coronavirus Related IRA Withdrawals.
I hope you found helpful this short article about Coronavirus Related IRA Withdrawals. Also, I have included some links for more detailed information. Contact us. Let our Estate Planning Lawyers walk you through this confusing process. Furthermore, feel free to contact our office for a free consultation.
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This Article was written by Attorney Andrew Barron.
Tags:
Income Tax, IRA Trust
