To assist those struggling financially during the pandemic, the U.S. Government allowed individuals to withdraw up to $100,000.00 from retirement accounts without incurring the standard 10% penalty for early withdrawals. To avoid the 10% early withdrawal penalty, you must have met the following criteria in 2020:
Diagnosed with the virus COVID-19;
Spouse or dependent diagnosed with COVID-19;
Experienced adverse financial consequences as a result of being quarantined, furloughed or laid off, or having work hours reduced due to COVID-19;
Experienced adverse economic consequences as a result of being unable to work due to lack of child care due to COVID-19; or
Experienced adverse financial effects resulting from closing or reducing hours of a business that you own or operate due to COVID-19.
(Adapted from IRS, see link below for full guidance.)
Most of us that lived through 2020 likely fit under one or more of these categories, and many took advantage of these withdrawals. However, even if the penalty is waived, you must still pay income tax on the money withdrawn. You have three options:
Pay the income tax in full in 2020.
Pay the income tax on the withdrawals over the next three tax years.
Repay the amounts withdrawn within three years to make the withdrawals tax-free.
While the extra money was undoubtedly helpful during the unprecedented COVID crisis, it takes careful planning to avoid the tax consequences. If you withdrew money from retirement in 2020, review the IRS guidance or discuss with your tax preparer to determine the best option for you.
These withdrawals were only allowed in 2020, but many are still struggling. Financial experts strongly discourage withdrawing from tax-deferred retirement accounts if you can avoid it. If you are considering withdrawing money from your retirement savings to pay debts, schedule a free bankruptcy consultation first. Bankruptcy may be able to help relieve your debt burden AND protect your retirement savings.
Theresa A. Peterson Law Office
Our office is conveniently located in Golden Valley at the intersection of Highway 100 and Duluth Street. We realize bankruptcy is a vital and often time-sensitive process, and the initial consultation is crucial to understanding your options. We are observing COVID protocols in the office and will meet with you by whatever means is most comfortable for you.
Sources:
IRS: Coronavirus-related relief for retirement plans and IRAs questions and answers
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