By Camille Smith
With 2020 coming to a close, it is the time for year-end tax planning. Meanwhile, many regions are experiencing a spike in coronavirus cases. To those ends, below is a refresher on some of the retirement related provisions of the CARES Act, passed in March of this year.
Required Minimum Distributions:
If you must generally take a required minimum distribution (RMD), for 2020 you can skip the distribution. This includes both RMD’s for over 70 ½ (72 if born after June 30, 1949) and inherited IRA’s. The distribution waiver applies to defined-contribution retirement plans like 401(k)’s, IRA’s, 403(b)’s. It does not apply to defined-benefit plans (i.e. pension plans). Keep in mind, it may make sense to take your RMD in 2020 or even convert your Traditional IRAs to Roth IRAs. This should be considered as a part of your 2020 year-end planning.
If like many people, you have been impacted by the pandemic and need some financial relief, you may be able to use your retirement funds. A qualified individual may withdraw up to $100,000 from his/her eligible retirement plan and receive special tax treatment for the withdrawal.
To be considered a qualified individual, you (or your spouse) must have been diagnosed with the coronavirus or you experienced any of the following financial hardships due to the coronavirus.
- Lay-off or furlough
- Reduced work hours or reduced pay (including self-employment income)
- Unable to work due to lack of child-care
- Job offer rescinded or delayed
- Your (or your spouse’s) business closed or had reduced hours
If you must take a distribution from your retirement account(s) due to Covid-19, the distribution is still subject to income taxes, but you can pay the taxes over three years (⅓ each year). You can also elect to pay the related income taxes in the first year. The distribution is not subject to the usual mandatory tax withholding. This withdrawal must be taken by 12/31/20.
If you are under the age of 59 ½, the additional 10% excise tax on early withdrawals is waived for coronavirus-related distributions.
Lastly, you may be able to repay the distribution back to your retirement account within three years and it would be treated as a rollover. In this case, you could claim a refund for any taxes you already paid on the withdrawal.
While taking a distribution from your retirement account may provide much needed relief, keep in mind that you will lose the tax deferred investment growth on any funds withdrawn.