Newsletter

Taking Early Withdrawals From Retirement Accounts

10/08/2020

While taking money out of a retirement fund before age 59 1/2 is usually not recommended, in certain cases, it may be unavoidable, especially during times of economic crisis. If you need cash and have a retirement fund you can tap, here’s what you need to know.

Background

When retirement plans such as the 401(k) were introduced, company pensions were still the norm. Today, however, very few companies offer pensions anymore and most people rely entirely on social security and whatever savings they’ve accumulated in their retirement account to get them through their golden years.

For many people, retirement accounts are their most significant source of cash, but because they were created to help you save money for your retirement years, withdrawals before retirement age (59 1/2) are discouraged. In fact, early withdrawals from traditional and Roth IRAs are subject to an additional 10 percent tax, unless an exception applies. Exceptions to the additional 10 percent tax apply for early distributions include the following:

  • Beneficiary or estate on account of the IRA owner’s death
  • Totally and permanently disabled
  • Distributions made as part of a series of substantially equal periodic payments for your life (or life expectancy) or the joint lives (or joint life expectancies) of you and your designated beneficiary
  • Qualified first-time homebuyer
  • Qualified expenses for higher education
  • Medical insurance premiums paid while unemployed
  • Unreimbursed medical expenses that are not more than a certain percentage of your adjusted gross income
  • Distributions due to an IRS levy of the IRA under section 6331 of the Code
  • A qualified reservist distribution, or
  • A qualified disaster distribution (certain rules apply)

Relief Under the CARES Act of 2020

Due to the coronavirus pandemic, there is additional relief for taxpayers experiencing economic hardships. The Coronavirus Aid, Relief, and Economic Security (CARES) Act helps eligible taxpayers in need by providing favorable tax treatment for withdrawals from retirement plans and IRAs and allowing certain retirement plans to offer expanded loan options.

Coronavirus-related withdrawals or loans can only be made to an individual (or the individual’s spouse) if they are diagnosed with the virus SARS-CoV-2 or with COVID-19 by a test approved by the Centers for Disease Control and Prevention or a test authorized under the Federal Food, Drug, and Cosmetics Act.

The individual must also experience adverse financial consequences as a result of the following conditions:

Quarantine. The individual, individual’s spouse or a member of the individual’s household (someone who shares the principal residence) is quarantined, furloughed, laid off, has work hours reduced, is unable to work due to lack of childcare, has a reduction in pay (or self-employment income), or has a job offer rescinded or start date for a job delayed, due to COVID-19.

Business closures or reduced hours. Closing or reducing hours of a business owned or operated by the individual, the individual’s spouse, or a member of the individual’s household, due to COVID-19.

Coronavirus-related Withdrawals from Retirement Accounts

Under the CARES Act, individuals eligible for coronavirus-related relief may be able to withdraw up to $100,000 from IRAs or workplace retirement plans before Dec. 31, 2020, if their plans allow. In addition to IRAs, this relief applies to 401(k) plans, 403(b) plans, profit-sharing plans, and others.

Coronavirus-related Loans from Retirement Accounts

Loans are not available from an IRA. Individuals who were eligible to take coronavirus-related withdrawals until September 22, 2020, were able to borrow as much as $100,000 (up from $50,000) from a workplace retirement plan if their plan allows.

For eligible individuals, plan administrators can suspend, for up to one year, plan loan repayments due on or after March 27, 2020, and before January 1, 2021. A suspended loan is subject to interest during the suspension period, and the term of the loan may be extended to account for the suspension period. Taxpayers should check with their plan administrator to see if their plan offers these expanded loan options and for more details about these options.

Tax Treatment of Coronavirus-related Withdrawals

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 $12,000 coronavirus-related distribution in 2020, you would report $4,000 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.

In summary, coronavirus-related distributions:

  • May be included in taxable income either over a three-year period (one-third each year) or in the year taken, at the individual’s option.
  • Are not subject to the 10 percent additional tax on early distributions that would otherwise apply to most withdrawals before age 59 1/2,
  • Are not subject to mandatory tax withholding, and
  • May be repaid to an IRA or workplace retirement plan within three years.

Questions?

Before withdrawing funds from a retirement account please call the office and speak to a tax professional. While you may be able to minimize or avoid the 10 percent penalty tax using one of the exceptions listed above including those under the Cares Act, remember that you are still liable for any regular income tax that’s owed on the funds that you’ve withdrawn and you may be liable for more tax than you anticipated when filing future tax returns.

Ask a Question

Find comfort in knowing an Expert in accounting is only an email or phone-call away.

We Are Here to Help

We will happily offer you a free consultation to determine how we can best serve you.

Blog

Attestation Services: Compilations, Reviews, and Audits CPAs offer attestation services as unbiased options

frequently asked questions

  • What Is A Virtual CFO & How Can It Transform My Business?
    • a. A Virtual CFO can be a much-needed sounding board, coach, and guide. Outsourced Virtual CFO is generally not just one person, but an experienced team of professionals providing a full-stack Accounting and Finance Department at a fraction of the cost that it would otherwise cost a business to hire even just one full-time CFO internally. The right virtual CFO service team, such as the one at Perpetual CPA, can deliver timely, detailed, comprehensive financial reporting, interpret the financial data, prioritize recommendations, give expert guidance on how to execute those recommendations, and ultimately give a better path to business success.
  • How can a Virtual Accounting Department help small businesses scale and grow?
    • a. A growing number of small businesses are opting to outsource services such as IT, human resources, or accounting. The benefit of a Virtual Accounting Department is that the company can reduce or increase services to accommodate current business needs. Because the service provider has multiple clients they can absorb fluctuations in workflow more easily than the average small/medium business can on its own.

      b. A Virtual Accounting Department can integrate with a company’s own accounting department to create a blended solution or provide a full-stack accounting department, including Accounting Staff, Manager, Controller, and Virtual CFO. By using a Virtual Accounting Department Small business owners don’t have to worry about hiring, training, figuring out compensation, and payroll compliance for the internal accounting team. Also as the business grows and new and more complex accounting and tax issues come up, the outsourced Virtual Accounting Department can provide all the needed expertise to facilitate continued business success.
  • What are the benefits of hiring a CPA firm?
    • a. Certified Public Accountants (CPAs) do a lot more than just crunch numbers and prepare taxes. They provide valuable expertise and strategies to help businesses and individuals achieve their business and financial goals. A CPA firm can help small businesses with management financial reporting, tax compliance, strategic business advice, and much more. Firms like Perpetual CPA, that specialize in helping small and medium-sized businesses achieve growth, can also provide Virtual CFO services, that help the business owners have the foresight into the short-term future cashflows and be able to more successfully navigate their business performance.
  • What are the best strategies for small business growth?
    • a. A business growth strategy is, simply, a plan of how a business gets from where it is today to where it wants to be in the future.

      b. Some of the questions to consider when coming up with a growth strategy are:
      i. Where will the business get new customers from?
      ii. How will the business expand into new markets?
      iii. What new products could the business offer?

      c. In reality, what happens with many small businesses, is that they generally achieve a specific level of business activity or sales and then the business growth trend flattens. In those cases, working with a firm like Perpetual CPA, which provides Virtual CFO services, can help small businesses avoid stagnation. Virtual CFO services, aside from providing timely accounting and tax reporting, can also provide valuable insight into the current performance of the business, as well as, foresight into the future cash flows for the business. Perpetual CPA Virtual CFO team helps small businesses interpret their financial information and come up with business strategies to help improve business performance and achieve growth.
  • What are the best strategies for small business risk management?
    • a. A risk management plan helps a business develop a detailed strategy to deal with certain risks that are particularly important for the businesses’ success.

      b. For many small and medium-sized businesses, the easiest way to develop and implement a business risk management plan is to work with a reputable CPA firm, such as Perpetual CPA. Large corporations invest a lot of resources and time into managing risk, which is a material factor that allows those large corporations to continue to generate billions of dollars in revenue every year. Small businesses, however, almost never manage any business risks, which is the major reason that over half of all the small businesses do not survive for more than 5 years. Generally, small business owners are not experienced corporate business professionals and lack the needed business knowledge, yet they often have to wear many hats while trying to get their businesses off the ground. In those situations, a CPA firm such as Perpetual CPA, can help small businesses better manage tax compliance risks, cash flow, internal controls, business administration, financial reporting, and much more.
  • What is Strategic Advisory and Virtual CFO? / How do Strategic Advisory and Virtual CFO services work?
    • a. When small businesses start spinning wheels, it is a good time to consider hiring a reputable CPA firm, such as Perpetual CPA, which can provide both Strategic Advice and Virtual CFO services.

      b. As a strategic advisor, the CPA firm will work with business management to improve the effectiveness and profitability of the business. They will look holistically at the business and find ways to operate the business more efficiently, increase customers through additional or improved marketing or improve customer touchpoints and service.

      c. As a Virtual CFO, the CPA firm is like a part-time version of a traditional CFO or Chief Financial Officer plus a full Accounting support team. They perform the tasks that in a larger organization would be performed by the CFO, Controller, and Accounting Staff such as preparing and overseeing the budget process, identifying and analyzing current and future trends, and developing strategies for the business growth.
  • How can timely financial visibility and management reporting help with better business decisions and growth?
    • a. A simple way to a successful business is to prioritize the timely financial visibility and management reporting as it means:
      i. Timely financial information and analysis are essential for making informed decisions, evaluating your company’s results, improving financial performance, and ensuring you are on the path to meet your strategic goals.
      ii. Management reporting is a source of business intelligence that helps business leaders make more accurate, data-driven decisions. But, these reports are most useful if they are available timely and the management receives proper interpretation of the business financial information.

free initial 30-minute consultation

    © Perpetual CPA 2023   •   Privacy Policy   •   Disclaimer   •   Accessibility Statement   •   Powered By   Designed by Dot Com Media Moguls