The COVID-19 pandemic has caused country-wide closures for businesses and led to major losses in income for many Americans. Due to this, a lot of Americans have had to make hard choices and dip into savings and even into their retirement accounts to help make ends meet. This has left taxpayers wondering what will be the tax consequences for them withdrawing from their retirement accounts.
Usually with a taxpayer withdraws from a traditional retirement account before they turn 59 ½ they are subjected to a 10% additional tax for early withdrawal, barring any extenuating circumstances. They are then subject to regular income tax. Fortunately, Congress recognized that for many Americans, withdrawing money from their retirement account would be necessary for them to pay their bills during the COVID-19 pandemic. Under the CARES Act, early withdrawals taken in 2020 due to COVID- 19 hardships will not be subject to the additional 10% tax if certain conditions are met. Qualified individuals could withdraw up to $100,000 from eligible plans between January 1st and December 30th, 2020.
In order to avoid the 10% penalty, the retirement distribution must be made to a qualified individual, from a qualified retirement plan and the distribution needs to have been made in the 2020 calendar year and that the aggregate distributions eligible for COVID-19 relief are not to exceed $100,000 per individual.
A qualified individual is defined as someone who:
- Has tested positive or been diagnosed with COVID-19
- Had a dependent or spouse who tested positive and been diagnosed with COVID-19
- Experienced 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- Having a job offer rescinded or state date for a job delayed
Eligible plans include an IRS, 401 (k), 401(a), an annuity such as a 403(a) or 403(b), and a government deferred compensation plan such as a 457(b).