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The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) was created in response to the COVID-19 pandemic to provide aid, relief, and increased economic security to affected individuals. The Act provided specific aid and tax benefits for taxpayers who needed to withdraw more money than usual from their retirement and 401(k) plans during the pandemic.
Section 2202 of the CARES Act allows individuals to access up to $100,000 from their 401ks and IRAs with fewer consequences. The period in which you were able to do this expired in 2020.
Can you withdraw from your 401k and IRAs with no penalty due to COVID-19?
You might have heard that early retirement withdrawals were tax-free due to COVID-19, but there are many caveats. First, here’s who qualifies for the exemption under the CARES Act:
- If you or a family member had COVID-19 based on a CDC-approved test
- Or if you had financial consequences because of COVID-19 related conditions including:
- If you couldn’t work due to a lack of childcare
- If your place of work had to shut down or cut hours substantially
- Or if you were furloughed or laid off
Second, to ensure you get your CARES Act 401k withdrawal money tax-free and penalty-free, you’ll want to repay the amount you withdrew over the next three years. If it’s not paid back within three years, it will ultimately be taxed, and you will risk penalties and interest.
Finally, keep track of your 1099-R . Make sure to provide it to your Tax Pro and let them know that you took money out of a qualified retirement plan during 2020. The IRS will know you took this money out, so you want to make sure this is reported properly on your income tax return.
Don't miss out on every credit and deduction you deserve!
The Consolidated Appropriations Act
On December 22, 2020, the President signed the Consolidated Appropriations Act. It contains over $900 billion of additional stimulus funding for COVID-19 relief. The Act includes:
- The withdrawal without penalties for up to $100,000. This applies to people affected by COVID and natural disasters too. The Act includes tax relief for those in presidentially declared disaster areas for major disasters on or after Jan. 1, 2021 and ending 60 days after the date of the Act’s enactment
- It touches on furloughed employees to avoid partial plan termination
- It extends the expanded limits for qualified retirement plan loans that were allowed under the CARES act (same 180 extension as the withdrawal no penalty)
- Also extends employers option to make payments of up to 5,250 tax free towards employee’s student loans
- Extended the grace period for unused FSA benefits for 12 months