Early Retirement Account Withdrawal Reminder
As discussed in our earlier post on March 31, 2020, the Coronavirus Aid, Relief and Economic Security (CARES) Act includes provisions that waive the penalty on certain early withdrawals from retirement accounts, allow the option for such withdrawals to be returned to a retirement account, and provides for a special three-year recognition of income from such distributions for some taxpayers. However, taxpayers must meet specific requirements to be eligible; therefore, the provisions are not available for all taxpayers.
Under the provisions of the CARES Act, the 10% penalty on early withdrawals from IRAs and other qualified retirement accounts is waived on withdrawals of up to $100,000 for distributions that occur during the 2020 calendar year, if they are made in the following circumstances: The individual is diagnosed with COVID-19 or has a spouse or dependent who is diagnosed with COVID-19, or the individual experiences adverse financial consequences due the outbreak, including being quarantined, being furloughed or laid off, having work hours reduced, being unable to work due to lack of child care due to the outbreak, having a business that is owned or operated by the individual closed or reduce its hours due to the outbreak. The Secretary of the Treasury is permitted to announce other factors in the future.
The income from the withdrawals is subject to inclusion in income ratably over a three-year period, such that one-third of the withdrawal(s) is recognized during each of the three years of 2020, 2021 and 2022.
Taxpayers may recontribute the previously-distributed amounts to a qualified retirement plan within three years. The three-year period is measured from the day after the date on which the distribution was received. Such recontributions can be made to the employer-sponsored plan from which they were originally distributed and/or to a traditional IRA.
Amounts recontributed will not be treated as taxable distributions. Instead, the recontributions will be treated as if they were rollovers of the original distributions, and the rollovers will be treated as if they had occurred within 60 days from the date on which the original distribution was made.