IRS Retirement Plan COVID-19 Hardship withdrawals USA Taxpayers
The background
I heard a rumor of Americans withdrawing money from their IRAs and 401Ks, two very common retirement investment vehicles, which allow most Americans the ability to invest in stocks, bonds, ETFs and even options, and watch their money grow in a tax deferred account. These accounts are funded with Pre-Tax dollars, I.e. earnings you haven’t paid any taxes on before they are deposited in these accounts, and they grow tax free until you withdrawal them, hopefully at a lower post-retirement tax rate.
The Rumor
The American news has been had some stories of American citizens taking advantage of a COVID-19 relief law from March, 2020, which allowed Penalty free withdrawals, called in some instances “loans”. The penalties on these early withdrawals from IRAs are usually very high, 50% of the withdrawal amount. But the US Congress added a rule in the COVID-19 relief bill that people in an economic crisis related to COVID-19 could with draw money from these accounts penalty free now, but it looks like you have to declare it as income over three years, and pay taxes on it as regular income. The last part isn't spelled exactly in the guidelines, but it states you must declare it as income, so my assumption is you pay taxes on it. But the three year period reduces the impact in any one year. Edited
The Second Rumor
The first rumor falls I think into news, which is useful, but not exciting. So it didn’t get much publicity, unfortunately. However, a much more titillating story broke this month of people withdrawing money from their retirement accounts to invest in.... you guessed it Bitcoin. Thus caught my eye, as I know it’s hard to invest in Bitcoin or any cryptocurrency for that matter from your retirement account, before the creation of the Grayscale Bitcoin investment Trust, so most people don't know you can invest with your IRA or 401k as Grayscale is listed on Nasdaq. See my post on Grayscale Link So I looked around for the facts and this is what I found.
The facts
Both the IRS Website and the SEC website have news bulletins on this withdrawal for COVID-19, so the rumor is true. However the devil is in the details. Basically you are eligible for this penalty free and tax free withdrawal if you get COVID-19, your wife gets COVID-19, you experience “Economic Hardship” defined as being furloughed, fired, hours reduced, the government orders your business closed or you can’t work because of the lack of available childcare.
If you meet one of those criterion you fill out a piece of paper “certifying” which criterion you meet and submit it to the company holding your retirement funds and a request to withdrawal up to $100,000 dollars USD. Interestingly enough, the company holding your funds isn’t required to verify your statement and can release the funds immediately.
The details
The SEC, the Securities Exchange Commission, appears to be mainly concerned about protecting taxpayers from scammers who use various lies to get your funds. The IRS site basically reiterates the criterion qualifying you for the withdrawals and has very useful information about the particulars of this withdrawal.
(Further details in the references below.)
Maybe there is a Santa Claus after all
Some are viewing this as a gift, as many retirement account balances in the USA have been greatly reduced by the March 2020 Stock Market Crash, which reduced the account balances of some 60 plus year old workers by 33-66% percent. So many people are looking for a way to recover from those devastating losses so late in the game, right before retirement. And you guessed it...it’s Bitcoin.
When it rains, it pours.
Bitcoin Mass Adoption seems like destiny now, with event after event increasing the number of infinite dollars chasing finite Bitcoin. The result is predictable.
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Further Information from the American Internal Revenue Service (IRS) website
The IRS government website has very clear details about this program, and here they are, straight from the horse’s mouth, so to speak:
Q3. Am I a qualified individual for purposes of section 2202 of the CARES Act?
A3. You are a qualified individual if –
*You are diagnosed with the virus SARS-CoV-2 or with coronavirus disease 2019 (COVID-19) by a test approved by the Centers for Disease Control and Prevention;
*Your spouse or dependent is diagnosed with SARS-CoV-2 or with COVID-19 by a test approved by the Centers for Disease Control and Prevention;
*You experience adverse financial consequences as a result of being quarantined, being furloughed or laid off, or having work hours reduced due to SARS-CoV-2 or COVID-19;
*You experience adverse financial consequences as a result of being unable to work due to lack of child care due to SARS-CoV-2 or COVID-19; or
*You experience adverse financial consequences as a result of closing or reducing hours of a business that you own or operate due to SARS-CoV-2 or COVID-19.
Under section 2202 of the CARES Act, the Treasury Department and the IRS may issue guidance that expands the list of factors taken into account to determine whether an individual is a qualified individual as a result of experiencing adverse financial consequences. The Treasury Department and the IRS have received and are reviewing comments from the public requesting that the list of factors be expanded.
Q4. What is a coronavirus-related distribution?
A4. A coronavirus-related distribution is a distribution that is made from an eligible retirement plan to a qualified individual from January 1, 2020, to December 30, 2020, up to an aggregate limit of $100,000 from all plans and IRAs.
Q5. Do I have to pay the 10% additional tax on a coronavirus-related distribution from my retirement plan or IRA?
A5. No, the 10% additional tax on early distributions does not apply to any coronavirus-related distribution.
Q6. When do I have to pay taxes on coronavirus-related distributions?
A6. The distributions generally are included in income ratably over a three-year period, starting with the year in which you receive your distribution. For example, if you receive a $9,000 coronavirus-related distribution in 2020, you would report $3,000 in income on your federal income tax return for each of 2020, 2021, and 2022. However, you have the option of including the entire distribution in your income for the year of the distribution.
Q7. May I repay a coronavirus-related distribution?
A7. In general, yes, you may repay all or part of the amount of a coronavirus-related distribution to an eligible retirement plan, provided that you complete the repayment within three years after the date that the distribution was received. If you repay a coronavirus-related distribution, the distribution will be treated as though it were repaid in a direct trustee-to-trustee transfer so that you do not owe federal income tax on the distribution.
If, for example, you receive a coronavirus-related distribution in 2020, you choose to include the distribution amount in income over a 3-year period (2020, 2021, and 2022), and you choose to repay the full amount to an eligible retirement plan in 2022, you may file amended federal income tax returns for 2020 and 2021 to claim a refund of the tax attributable to the amount of the distribution that you included in income for those years, and you will not be required to include any amount in income in 2022. See sections 4.D, 4.E, and 4.F of Notice 2005-92 for additional examples.
Q8. What plan loan relief is provided under section 2202 of the CARES Act?
A8. Section 2202 of the CARES Act permits an additional year for repayment of loans from eligible retirement plans (not including IRAs) and relaxes limits on loans.
*Certain loan repayments may be delayed for one year: If a loan is outstanding on or after March 27, 2020, and any repayment on the loan is due from March 27, 2020, to December 31, 2020, that due date may be delayed under the plan for up to one year. Any payments after the suspension period will be adjusted to reflect the delay and any interest accruing during the delay. See section 5.B of Notice 2005-92.
*Loan limit may be increased: The CARES Act also permits employers to increase the maximum loan amount available to qualified individuals. For plan loans made to a qualified individual from March 27, 2020, to September 22, 2020, the limit may be increased up to the lesser of: (1) $100,000 (minus outstanding plan loans of the individual), or (2) the individual's vested benefit under the plan. See section 5.A of Notice 2005-92.