Some investors are finding it confusing to decipher all the information circulating regarding Coronavirus financial relief.
Clients and friends have been asking questions. I’ve found there is much misinformation out there – all creating confusion.
I want to address three big misconceptions we are seeing. This IRA and 401(k) option could lead to a very valuable strategy if used correctly.
#1: Everyone is eligible for a “coronavirus-related distribution” (CRD) from their IRA or 401(k). FALSE.
The CARES Act allow individuals to withdraw up to $100,000 of IRA and company plan funds during 2020 and receive special tax breaks. These withdrawals are called “coronavirus-related distributions” (CRDs). However, not everyone is eligible to take these withdrawals and qualify for the relief. Under current rules, you are eligible only if you are in one of these categories:
- You are diagnosed with the SARS-CoV-2 or COVID-19 virus by a test approved by the CDC;
- You or your spouse or dependent is diagnosed; or
- You experience “adverse financial consequences” on account of:
- Being quarantined;
- Being furloughed or laid off or having work hours reduced;
- Being unable to work due to lack of childcare; or
- Closing or reducing hours of a business you owned or operated.
The law gives the IRS the authority to expand these categories, but that has not happened yet.
#2: Company plans must allow coronavirus-related distributions. FALSE.
Although the CARES Act allows companies to allow CRDs, companies are not required to offer them – even if you are in one of the above categories. Many plans are offering CRDs, but check with your company HR Department or the plan administrator to make sure.
#3: Coronavirus-related distributions are tax-free. FALSE.
If you are under age 59 ½, your CRD is exempt from the 10% early distribution penalty. However, the CRD is generally subject to federal taxes. One of the relief provisions does allow you to spread out federal income taxes over three years. In addition, you can avoid federal taxes altogether by paying back the CRD to an IRA or company plan within three years of receiving it.
Did any of these answers come as a surprise to you? If so, I encourage you to talk with your financial advisor. Or give me a call (719-630-0600), email me (Greg@2ndHalfWealth.com), I am always happy to answer any questions you might have.
