Will I Face Tax Penalties if I Withdraw Funds from a Retirement Plan?

 Posted on August 25, 2020 in Taxation Law

Many Americans have spent years saving money in a retirement account such as a 401(k) or IRA while planning to use this money to support themselves later in life. Retirement accounts can offer certain tax benefits, but they also provide restrictions on when these funds can be withdrawn. In times of economic hardship, account holders may wonder about their options for using these funds. Fortunately, the Coronavirus Aid, Relief, and Economic Security (CARES) Act has given those who have been affected by the COVID-19 crisis the ability to use funds in a retirement account while avoiding some of the penalties for early withdrawal.

Withdrawals and Loans from Retirement Accounts Under the CARES Act

Typically, account holders will face a 10 percent penalty (on top of any taxes that would normally apply) if they withdraw funds from a retirement account before reaching the age of 59 ½. The CARES Act has waived this tax for withdrawals of up to $100,000 made before December 31, 2020, by people who qualify for relief due to being impacted by the coronavirus pandemic. Qualifying accounts and retirement plans include 401(k)s, IRAs, 403(b)s, and profit-sharing plans.

Individuals will be exempt from the 10 percent early-withdrawal tax if they or their spouse have been diagnosed with COVID-19 or if they have suffered financial hardship because of job-related issues caused by the pandemic. These issues may include being laid off, having work hours reduced, experiencing a reduction in pay, being unable to work due to lack of child care, or being required to close a family-owned business or reduce hours of operation.

While the additional 10 percent penalty will not apply to withdrawals, a standard income tax will apply. However, withdrawals will not be subject to mandatory tax withholding. Instead, a person can either include the funds in his or her taxable income for the current tax year or spread this income out over the next 3 years. In addition, withdrawals can be repaid to the account or retirement plan within 3 years.

An account holder who is eligible for coronavirus-related relief will also be able to take a loan of up to $100,000 from a workplace retirement plan such as a 401(k), as long as this type of loan is allowed under the plan. The previous limit for these types of loans was $50,000. If a person is eligible, a plan administrator may suspend loan repayments that are due before January 1, 2021. The loan will still be subject to interest during this period of suspension, and the term of the loan may be extended based on the length of the suspension period.

Contact Our San Jose, CA Retirement Plan Tax Lawyer

If you have experienced financial difficulties due to the COVID-19 pandemic, you may be wondering about your options, including whether it would be beneficial to use the funds in your retirement accounts. At John T. Teter Law Offices, our skilled San Jose, CA tax attorney can advise you on the steps you can take to receive tax relief, and we will help you determine the best strategies for using the resources available to you. Contact us today at 408-866-1810 to schedule a private consultation.

Source:

https://www.irs.gov/newsroom/irs-new-law-provides-relief-for-eligible-taxpayers-who-need-funds-from-iras-and-other-retirement-plans