The CARES Act provides relief to people under age 59 ½ that are impacted negatively by the pandemic. This relief includes coronavirus-virus related distributions and emergency withdrawals of up to $100,000 from one or multiple retirement account(s). Typically, there is a 10% penalty for withdrawing funds from a retirement account before the age of 59 ½. However, under the CARES Act guidelines, people under the age of 59 ½ who are struggling financially can have emergency access to retirement funds without penalty.
Knowing if You Qualify for an Early Retirement Distribution
Do you qualify for a penalty-free pandemic-related early retirement distribution? Some of the qualifications include:
- You or a household member was diagnosed with COVID-19
- You experienced financial hardships due to;
- Delayed start date for a job
- Rescinded job offer(s)
- Lay off
- Reduction in pay or hours (including self-employment)
- Inability to work due to lack of child care
- Other reasons – https://www.irs.gov/pub/irs-drop/n-20-50.pdf
Understanding the Tax Implications of Early Retirement Distributions
It’s important to note that, although this part of the CARES Act allows you to avoid paying the 10% penalty for early withdrawal, you are still required to claim the income on your tax return. To lessen the heavy tax burden that could arise from this, people are allowed to claim 1/3 of the money evenly in each of the next three years, unless otherwise decided.