Taxpayers can dip into Coronavirus Aid, Relief, and Economic Security Act-specified retirement accounts without suffering a penalty, according to an Internal Revenue Service press release published yesterday. The reminder comes days after the $600 unemployment benefits included in that legislation expired.
How do the retirement account withdrawals work?
“Under the CARES Act, individuals eligible for coronavirus-related relief may be able to withdraw up to $100,000 from IRAs or workplace retirement plans before December 31, 2020, if their plans allow,” the IRS writes. “In addition to IRAs, this relief applies to 401(k) plans, 403(b) plans, profit-sharing plans, and others.”
The IRS outlines four ways the CARES Act makes pulling money from retirement accounts easier for those facing hardships during the pandemic, including penalty-free repayments: “These coronavirus-related withdrawals:
- May be included in taxable income either over a three-year period (one-third each year) or in the year taken, at the individual's option.
- Are not subject to the 10% additional tax on early distributions that would otherwise apply to most withdrawals before age 59½,
- Are not subject to mandatory tax withholding, and
- May be repaid to an IRA or workplace retirement plan within three years.”
Loans are also available from certain retirement plans until September 22, 2020. The IRS says taxpayers can “borrow as much as $100,000 (up from $50,000) from a workplace retirement plan, if their plan allows.” However, IRAs are not eligible for this loan program.
To qualify for a retirement-plan withdrawal or loan, taxpayers must satisfy one of the following requirements:
- Be diagnosed with COVID-19 by a CDC-approved test
- Have a spouse or dependent diagnosed by an approved test
- Show that COVID-19 has caused financial hardship
Taxpayers who need to satisfy the financial-hardship requirement must show that they or their spouse have lost a job, worked reduced hours, been paid less, had to close a business, or some other similar difficulty due to the coronavirus pandemic. Many American businesses have been forced to close or adopt modified schedules due to local restrictions—restaurants, for example, have been hard hit by stay-at-home orders and limits on social gatherings.
Notice 2020-50 and an FAQ page on IRS.gov include further details about making withdrawals and taking loans from qualifying retirement plans.