Normally, participants who withdraw money from a tax-deferred retirement account before reaching age 59½, must pay a 10% early withdrawal penalty in addition to including the distribution in their taxable income for the year.
The Cares Act provided more flexibility for making emergency withdrawals from a tax-deferred retirement account by eliminating the 10% early withdrawal penalty. Participants are allowed to withdraw up to $100,000 per person without being subject to a tax penalty. Any early withdrawals above that amount don’t qualify for special tax treatment.
It is important to note that the withdrawal is taxable income — the special tax treatment waives the tax penalty but not the taxable event. However, the CARES Act allows people who take hardship distributions to elect to pay federal income taxes on the distribution over a three-year period or repay the distribution amount over a three-year period and avoid tax consequences entirely. The three-year repayment period starts on the day of the distribution.
CONTACT US TODAY if you have any questions or need help with the preparation of tax returns.
Sincerely,
Maryna Varabyova, CPA
(877) 677-3737
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