Thoughts on Cash: The CARES Act and Retirement Provision F. Marc Ruiz: Your thoughts for cash


As the second wave of COVID-19 is unfortunately gaining momentum, my practice has again focused attention on some of the tax rules related to the first CARES law. With this in mind, I have had a number of conversations over the past few weeks about the COVID-19-related rules for retirement benefit plans. So I want to reconsider the rules and then talk about some of my best practices related to this process.

The CARES Act opened a window for a unique way of withdrawing retirement benefit plans related to the pandemic. The law allows people affected by COVID-19 up to $ 100,000 from a retirement plan like an IRA, 401 (k), SIMPLE-IRA, 457 plan, or 403 (b) in 2020 with some very special taxes – and distribute rollover rules.

Typically, amounts removed from a retirement plan are taxed as income in the year they are withdrawn. If the account holder is younger than 59 ½ years at the time of withdrawal, an additional penalty of 10% will be deducted from the account amount.

However, a qualifying COVID payout is not subject to the 10% early payout tax penalty if the account holder is under 59½. In addition, the payout will be included in income and taxed in three “installments” to be made in 2020, 2021 and 2022, which means that the taxes due on the payout can be spread over several tax years.

Typically, funds withdrawn from an employer-sponsored plan such as a 401 (k) must withhold at least 20% for payment of federal taxes. However, no plan-level withholding tax is required for a COVID-qualified deduction. And perhaps most unique, the government allows the withdrawn funds to be returned to the retirement plan for up to three years after they are withdrawn, essentially treating the repayment as a rollover, where the newly deposited amount is excluded from taxation.

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