Ask Bob: CARES Act Allows “Qualified” Individuals to Take Up to $100,000 of Penalty-free, Coronavirus-related IRA and Company Plan Distributions During 2020

Robert Powell, CFP®

Question

I took $100,000 out of my IRA in early January 2020 and took another $25,000 in late April 2020. Probably one more $25,000 to take out later this year.

Being eligible as “quarantined“ how do I declare at tax time an amount of say $50,000 as a loan to be paid back over three years? That means I would not show $16,667 each year as income on my tax return, right?

Now, what if in three years, I am 80 years old and my IRA provider says they don’t take money back as they don’t declare loans. Can I buy a $50,000 IRA in some bank?

Not only would I receive a tax saving, if I read the rules right, but my Medicare Part B premiums and Part D surcharge will be less. It sounds easy enough to do but confusing.

Answer

I would be mindful of the IRS guidelines on who is eligible to withdraw from a retirement account and have the ability to pay it back in three years to avoid the taxes, cautions Timothy Kenney, CFP, founder of TK Pacific Wealth.

Timothy Kenney
Timothy Kenney, CFP

Per the IRS website, you qualify if you fit one of these categories:

  • You are diagnosed with the virus SARS-CoV-2 or with coronavirus disease 2019 (COVID-19) by a test approved by the Centers for Disease Control and Prevention;
  • Your spouse or dependent is diagnosed with SARS-CoV-2 or with COVID-19 by a test approved by the Centers for Disease Control and Prevention;
  • You experience adverse financial consequences as a result of being quarantined, being furloughed or laid off, or having work hours reduced due to SARS-CoV-2 or COVID-19;
  • You experience adverse financial consequences as a result of being unable to work due to lack of child care due to SARS-CoV-2 or COVID-19; or
  • You experience adverse financial consequences as a result of closing or reducing hours of a business that you own or operate due to SARS-CoV-2 or COVID-19.

“Now, if you do qualify as having adverse financial consequences under quarantine under these rules, the taxes will still need to be paid in the 2020 tax year,” says Kenney. “Once the contributions have been put back into the retirement account at a later date, you can file an amended 2020 return and claim a refund of that portion of your taxes.”

One more thing to note: The CARES Act also includes a waiver of required minimum distributions (RMDs) for 2020 from company savings plans and IRAs.

Got questions? Get answers!

Got questions about Social Security, Medicare, retirement, investments, or money in general? Get answers. Email Robert.Powell@Maven.io. Kim McSheridan assisted with this report.

Comments (1)
No. 1-1
Maria1969
Maria1969

What if your dependent has reduced hours do you still qualify for the withdrawal.?


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