Temporary Penalty Free Early Distributions from Retirement Funds
Everything you may need to know.
By the numbers:
- The usual 10% withdrawal penalty on Qualified Retirement Plan (QRP) distributions taken prior to age 59 ½ is waived for “coronavirus-related” distributions made prior to Dec. 31, 2020.
- A coronavirus-related distribution is one made to someone:
Who is diagnosed with SARS-CoV-2 or COVID-19
Whose spouse is so diagnosed
Who experiences adverse financial consequences as a result of being quarantined or losing the ability to work
- Maximum distribution is $100,000.
- Distributions are not subject to mandatory income tax withholding.
- A coronavirus-related distribution may be included in income over a three-year period.
- Additionally, a coronavirus-related distribution may be re-contributed over a three-year period to any QRP plan of the participant.
Relaxing of restrictions
Congress and the White House are making it easier for Americans struggling with the fallout from the Covid-19 Pandemic, to draw on the trillions of dollars in their retirement accounts.
Americans will be able to withdraw money from tax-deferred accounts without penalties, for a limited time. Requirements limiting 401(k) loans will be relaxed, and many retirees can avoid the required minimum distribution, for a limited time also.
Some of the changes reflect what’s been done for retirement savers after previous disasters. In general, though, the adjustments are “much more significant than what was done previously.
Loose rules
One provision lets investors of any age and without withdrawal penalties, take as much as $100,000 from retirement accounts this. Taxes on these withdrawals can be avoided if the money is put back in the account within three years. If the withdrawal is unable to be returned into a retirement account, taxes can be paid over three years.
The language of the new law requires that the money be a “coronavirus-related distribution,” but the temporary rules greatly relaxed from the norm. People diagnosed with the virus are eligible, along with anyone who “experiences adverse financial consequences” as a result of the pandemic, including an inability to find work or child care. Retirement plan sponsors are told to rely on employees’ word that they’re eligible.
The new temporary requirements make it easier to borrow money from 401(k) accounts, raising the limit to $100,000 from $50,000. The payment schedules for 401(k) loans due the rest of 2020 will be extended for a year.
When retirees reach their early 70s, they’re required to start taking money out of tax-deferred accounts like 401(k)s and IRAs, and pay taxes on those distributions. The legislation waives those rules in 2020.
Required minimum distributions are waived for 2020. Normally these distributions would have been based on their account balances at the end of 2019, when the amounts were generally much higher than they are now.
In every case, it's always best to understand and estimate your marginal tax bracket before making any decisions. Additionaly, it's always good to reach out to your qualified tax advisor to assist in making these decisions.
Last Resort
While tapping one’s 401(k) may be a necessity, it should be viewed as a last resort. Individuals should first estimate the potential income a retirement account could generate in retirement and compare the effect a withdrawal could have on that amount. I recommend you don’t mortgage your future if you have other options. Reach out to our office if you have further questions or seek advice on what’s the best course of action for you.
DISCLAIMER: The views expressed herein are exclusively those of Robert Taylor and do not reflect the policy or position of GVCA. The content is not meant as investment advice and are subject to change. No part of this report may be reproduced in any manner without the express written permission of Robert Taylor. Information contained herein is derived from sources we believe to be reliable, however, we do not represent that this information is complete or accurate and it should not be relied upon as such. All opinions expressed herein are subject to change without notice. This information is prepared for general information only. It does not have regard to the specific investment objectives, financial situation and the particular needs of any specific person who may receive this report. You should seek financial advice regarding the appropriateness of investing in any security or investment strategy discussed or recommended in this report and should understand that statements regarding future prospects may not be realized. You should note that security values may fluctuate and that each security’s price or value may rise or fall. Accordingly, investors may receive back less than originally invested. Past performance is not a guide to future performance.
CITATIONS:
1. grassley.senate.gov/news/news-releases/cares-act-recovery-check-faq
2. irs.gov
3. taxfoundation.org/cares-act-senate-coronavirus-bill-economic-relief-plan