With retirement savings, The CARES Act allows for exceptions before the 10% kicks in. (It's been an exceptional year, after all).
In 2020, many Americans had to withdraw money early from retirement accounts to stay afloat due to COVID. It was not uncommon. Certain industries, like travel and tourism, were impacted greatly, so workers in those fields felt the pinch.
Normally, a 10% federal tax penalty would apply for early distributions, but thanks to The CARES Act, the IRS made exceptions.
For example, if you were diagnosed with COVID last year using a test approved by the Centers of Disease Control (CDC) — or your spouse or child was diagnosed — it would qualify as an exemption. Many financial situations also qualify as exemptions, situations many Americans found themselves in, unfortunately, due to the virus’ effects on the economy: Layoffs, reductions in work hours or self-employment income; and business closures.
To be eligible for the exemption from the 10% penalty, the withdrawal also had to be $100,000 or below per person (not per account). It must have been a withdrawal from a retirement account such as a traditional IRA or employer-provided retirement plan, like a 401K or 403B.
Your accountant, of course, can look at all the factors at play and help you determine if your circumstances qualify you for an exemption.
Three-year distribution spread
The CARES Act also eases the burden on taxpayers a bit in another way, too. Those who withdrew money from retirement accounts before they turn 59 ½ also have the option to spread the payment of taxes on that distribution over three years.
In other words, from the date of withdrawal, you have three years to deposit some or all that money back into the plan with no taxes owed on the original withdrawal — unless you choose not to.
However, past tax returns will need to be amended and refiled to reflect this action. That’s where Kerby Accounting & Business Solutions comes in. We are here to answer any questions you have on this or any other tax or accounting issue. COVID complicated our 2020, for sure, but The CARE Act makes it a bit less exasperating.