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I lost my job because of COVID-19 cutbacks — can I tap into my IRA?

Make sure you read the fine print

11/22/2020 4:46:00 AM

Dan Moisand is a financial planner who's trying to help readers navigate the financial impacts of COVID-19. One asks: Can I tap into my IRA if I lost my job?

Make sure you read the fine print

— TimA.: Tim, there is no provision for tax-free IRA distributions. What your ex-coworker may be referring to is a Covid-related Distribution. The CARES Act, aka the stimulus package, passed earlier in the year waives the 10% penalty normally incurred for IRA withdrawals prior to 59½ if you were adversely affected by COVID. Only the 10% penalty is waived not the income taxes. Distributions can be made at any time in 2020 up to a cumulative total of $100,000. (Similar rules apply to tapping a 401(k) or other qualified retirement plan but plans are not required to allow COVID-related transactions.)

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Read our COVID-19 news coverageTo be considered COVID-related, you, your spouse, or dependent must be 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; or you must experience adverse financial consequences.

Adverse consequences are being furloughed or laid off, having work hours reduced, being unable to work due to lack of child care, or closing or reducing hours of a business that you own or operate; due to SARS-CoV-2 or COVID-19When you take the distribution you can either report all the income on your 2020 tax return or split the income evenly over 2020, 2021, and 2022. You cannot split in any other proportion. It is important to note that you are splitting the income and not the taxes due. If you take $45,000 of distributions, you are either putting $45,000 of distributions on your 2020 tax return or $15,000 on the 2020, 2021, and 2022 returns respectively.

Read: There are six types of retirees. Which one are you?It is possible that if you go back to work, your income could be higher in 2021 or 2022, creating a higher tax rate than if you paid it all up front. There is a bit of a safety valve in such a scenario.

You can repay any portion of a distribution at any time up to three years from the day after you take a distribution. Normally, there is a once-per-year 60-day rollover rule for IRA distributions that limits your ability to return money to an IRA and eliminate tax on the distribution. This once a year rule does not apply to COVID-related distributions.

So, if you paid for the $45,000 distribution on your 2020 return, you could get your taxes refunded by putting the $45,000 back in the IRA after you returned to work. You would file an amended 2020 return reducing your reported distributions for 2020 by any portion of the $45,000 paid back within three years.

If you opt to spread the income over three years and pay a portion of what you took out at some later date, its more complicated. The payback causes the income to be reduced proportionately on all three years returns.Read: How to cope with seasonal depression in an already-challenging year

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For example, say you take out $45,000 in 2020 and spread it over three years ($15k on each year’s tax return). Right before your three years are up, you payback $33,000. This makes the net distribution $12,000 ($45,000 - $33,000), or $4,000 a year. You would amend your 2020, 2021 and 2022 tax returns to show IRA distributions $4,000 each year. You would be refunded the taxes attributable to the $33,000 ($11,000 2020, 2021, and 2022 respectively.)

If you have a question for Dan, please email him with “MarketWatch Q&A” on the subject line. Read more: MarketWatch »

The US added just 245,000 jobs in November as labor market stalls

Hiring in the US is now so slow, it could take another 40 months for the job market to fully recover from the pandemic.

IRA's are taxed heavy when used as a just savings account. The IRS could be the financial version of the U.S. Army when it come to compassion. thanks What a moneymaking scam. Plenty of jobs, most do not pay. The main thing is get another job & keep going ! Americans are stagnating , sitting , T.V. etc. , waiting on free money.