Last week we discussed Section 2203 of the CARES Act – Waiver of Required Minimum distribution. This week we will briefly discuss Sec. 2202 – the Special Use of Retirement Funds.
Section 2202 loosens up restrictions on access to retirement funds. This provision allows a waiver of the 10% early withdrawal penalty for “coronavirus related distributions” from qualified retirement plans (401K, 457, IRA, etc.) up to $100,000 aggregated across all plans. But, what qualifies as a “coronavirus related distributions”?
- You, your spouse, or your dependent were diagnosed with COVID-19, OR
- You have experienced adverse financial consequences as a result of being quarantined, being furloughed, laid off or have had your work hours reduced due to the virus or must care for a dependent due to COVID-19
An important note to mention is even though the 10% early withdrawal penalty is waived, it does not mean there will not be taxes due. There are two options here:
- The individual can waive regular tax withholding, but then must redeposit the full amount taken within 3 years.
- The individual can pay taxes on the distribution over the course of 3 years. This should be selected if the individual does not anticipate being able to return the funds back to the qualified retirement account.
SEC. 2202 also loosens restrictions for loans in qualified retirement plans. We won’t go into too much detail here, but know the loan amounts have increased and payback periods have loosened as well.
We are not advocating that you begin taking distributions from your qualified retirement plan, but we do want you to know there are options available if you are struggling during these times. It is important to consider all available options and the implications of each before making a final decision. Taking fuds from a retirement account is not the most efficient area to seek relief. If at all possible, exhaust all other resources.
We consider qualified retirement plans to be your “Best Money.” WHY? Because it is growing tax-deferred. And what better time to be invested – everything is on sale! We wouldn’t want you to miss out on the big upswing in the market.
Our final note – DOCUMENT, DOCUMENT, DOCUMENT. If you do need to take a distribution, please work closely with your CPA and financial advisor to insure you are keeping a document trail for when it comes time to file taxes.
Worthwhile Wealth Council is not a tax advisor and offers no tax advice services. Further, WWC emphasizes your tax payer responsibility to maintain appropriate tax records and encourages you to seek appropriate tax advice from a qualified tax advisor regarding this and any other transactions that may have tax payer consequences for you and your reporting requirements.
Have a great weekend!
Sources: https://www.congress.gov/116/bills/hr748/BILLS-116hr748enr.pdf