By: Amy Irvine, CFP®, EA, MPAS®, CCFC
What is this?
Normally, if you are under the age of 59 ½ (unless an exception applies), you are subject to a 10% early withdrawal penalty from retirement distributions.
The CARES Act waives the 10% penalty for COVID-19 related distributions up to $100,000 from retirement plans (IF permitted by the plan) and IRAs.
The distribution IS still taxable, just the penalty is waived. This income, however, can spread out over 3-years.
The regulations also state that you can “make-up” these distributions over the next three years above and beyond your normal contribution limits.
NOTE: These are NOT considered hardship distributions, therefore the hardship rules do not apply
What is a COVID-19 Related Distribution?
A distribution in 2020 made to you IF you are diagnosed with COVID-19; OR
If you are quarantined, furloughed, laid off, have a reduction and hours, or unable to work because you have lost your childcare services.
What if I have a loan in my 401k?
Loan repayment may be deferred up to one year (check with your employer’s plan administrator to determine if interest will continue to accrue), IF you are a COVID-qualified individual (see above)
What if I want to take a loan?
Normally, the limits to a loan are 50% of your balance up to a maximum of $50,000
Under the CARES Act, this was increased to 100% of your balance up to a maximum of $100,000 for a qualified individual if made within 180-days of the March 27th enactment of the Act.
What if I am over 72 or in required minimum distribution (RMD) status?
You are permitted to skip taking your RMD this year
Inherited IRA’s also have this benefit
What if I already took the RMD?
We are awaiting further guidance on this but the normal rules for rollover currently apply.
I’ve heard I can fund my Health Savings Account (HSA) with retirement assets?
Yes, you can make a one-time, no penalty, tax-free rollover from your IRA to your HSA.
This is called a Qualified HSA Funding Distribution
Can I use my HSA even if I’m Unemployed?
Yes.
The CARES Act also added language that allows for the purchase of over-the-counter medications with your HSA (and Flexible Spending Accounts) for items such as pain and allergy relief and testing and treatment for COVID-19 benefits before your deductible is met.