You should be considering withdrawing from your retirement savings if you are out of work and need income. Normally you have to pay a 10 percent early withdrawal penalty if you will withdraw money from employer-provided accounts and the traditional Individual Retirement Account (IRA) before reaching the age 59 ½.
Furthermore, if you were to meet a limited set of approved hardships like home repairs after a disaster, avoiding foreclosure, or medical expenses, emergency withdrawals from your current employer-provided plans are limited to a certain amount.
You may be given more flexibility to make an emergency withdrawal from tax-deferred retirement accounts during 2020 since there will be temporary changes to the rules under the CARES Act if the pandemic has negative effects on your finances.
If you are under the age of 59 ½, the CARES Act eliminates the 10 percent early withdrawal penalty. Unless you will elect, for each of the next three years one-third of the money you will withdraw will be included as income in your taxes. You will be given the chance to pay back what you withdraw according to the CARES Act if you will be able to do so.
Please note that in this article we will not be discussing retirement plan loans instead we will be talking about withdrawals from retirement plans. You should spend some time looking into the pros and cons of taking a loan and withdrawing money. Below are the things you need to learn when taking a loan from your retirement accounts.
With the changes, what tax-deferred accounts are affected?
A traditional IRA
401(k) or 401(b) or an employer-provided retirement plan and other types of defined contribution plans.
There are related distribution options. However, through other covered financial hardship categories, you may qualify for a distribution from your plan. As long as you will meet the qualifications to be stated below, the money that you will receive from these distributions can be treated as a coronavirus-related distribution in your tax return.
How will you know you qualified for this exemption?
If any of your family members, you, your spouse, became COVID-19 positive by a CDC-approved test, or
If you experienced adverse financial consequences such as delayed start date of job, quarantine, rescinded job offer, furlough, lay off, closing or reduction of your business, reduction in pay or hours of employment income, an inability to work due to lack of childcare, or other factors that are identified by the Department of Treasury which is a result of certain COVID-19-related conditions.
From January 1, 2020, to December 30, 2020, a qualified individual that meets the criteria mentioned above and an eligible retirement plan is where the coronavirus-related distribution can be claimed.
How much can you withdraw without any recurring penalties?
In 2020, each person is allowed up to $100,000 withdrawal with the exemption of a 10 percent penalty. Note that this $100K is not per account but per person. Getting the CARES Act and special tax more than this amount from all your accounts is not allowed.
For the taxes that you may owe on employer-provided plans like your 401(k), please note that the 20 percent automatic withholding used as an advance payment will be eliminated by the CARES Act. When you withdraw or cash out from a traditional IRA plan, this 20 percent withholding is not a requirement. Since there is a high chance you might owe some of that money in taxes later, it is best not to spend the full amount you withdraw.
Will you get the full balance?
If you just got your job and are not considered fully-vested for the purposes of retirement, the portion of your employer’s contributed funds may not be available to you if you are withdrawing from an employer-based account. Your employer may not allow you to access that portion of your account even if you are fully vested.
How long will it take for you to withdraw the money from your account?
The process could take several weeks. You should give yourself at least a two-week buffer just in case paperwork will be delayed or will get lost if you need the money for something sensitive. You can talk to your plan administrator or provider and ask for an estimated timeline.
