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Americans Are Being Forced to Tap into Their Retirement Savings During COVID-19
The COVID-19 pandemic has had a devastating financial impact on thousands of Americans across the country. During the second quarter of 2020, the economy contracted by 32%, resulting in millions of taxpayers have filed for unemployment for the first time, but even those monies have not been sufficient to cover living expenses for many. In July, the additional $600 unemployment benefit included in the Coronavirus Aid, Relief and Economic Security Act (CARES Act) came to an end.
Americans have started tapping into their retirement funds to help cover the financial gap.
More Americans Using Retirement Funds
It is estimated that 14% of Americans have already tapped into their retirement savings to help pay for necessary expenses, with an additional 13% planning to do so in the near future. For those nearing retirement, that could cause a delay in their retirement date.
The CARES Act provides some relief for those who find it necessary to take a distribution from their retirement accounts during these turbulent times. Here’s what you need to know.
Retirement Distributions
Ordinarily, distributions from 401(k)s, 403(b)s, traditional IRAs and other qualified retirement plans may usually not be taken prior to age 59 ½ without being subject to penalties. Taxpayers younger than 59 ½ are typically assessed a 10% withdrawal penalty in addition to the income taxes that must be paid on the withdrawn funds.
The CARES Act however, provides a provision that allows certain retirement savers to withdraw the funds from their retirement accounts without penalty.
According to the CARES Act, taxpayers who are impacted by the coronavirus pandemic may waive the 10% penalty for retirement distributions if they meet some of the following criteria:
- The taxpayer is diagnosed with the virus SARS-CoV-2 or with coronavirus disease 2019 (COVID-19) by a test approved by the CDC,
- Their spouse or dependent is diagnosed with the virus or disease by test,
- They experience adverse financial consequences as a result of being quarantined, furloughed, or laid off,
- They had work hours reduced due to such virus or disease,
- They are unable to work due to lack of childcare due to such virus or disease, or
- They had to close or reduce hours of a business owned or operated by them due to such virus or disease.
The distributions must be included in the income of the taxpayer and can be included ratably over a three-year period or reported in total on the 2020 return. While the money received from a retirement distribution is not subject to the 10% withdrawal penalty, the distributions are still subject to income taxes.
However, if you choose to take the coronavirus distribution as a loan, the amount must be repaid over the course of three-years (tax years 2020, 2021, and 2022). Provided that the total amount is repaid during the three-year timeframe, the distribution will be considered a trustee to trustee direct transfer and consequently would not be subject to income taxes.
The COVID-19 pandemic has had a significant financial impact on many Americans. The retirement distribution provision of the CARES Act can provide some relief when it comes to covering your financial needs. However, tapping retirement saving should be your last resort.
If you have any questions regarding the relief provisions of the CARES Act, retirement distributions, or would like to learn more about our services, please feel free to contact us for more information.
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Get to Know Prestige Accounting Services Group (previously Prestige Wealth Accounting Group)
Offices in Flemington, NJ and Califon, NJ
Our Mission: At Prestige Accounting Services Group (previously Prestige Wealth Accounting Group), we are on a mission to redefine the tax experience for individuals and small businesses. With a focus on personalized service, strategic planning, and expert guidance, we aim to empower our clients to succeed financially with confidence and ease.
Expertise in Action: With a wealth of experience and a team of dedicated professionals, we specialize in individual and small business tax preparation. While we excel in all areas of taxation, our passion lies in serving the unique needs of small business owners in New Jersey. We understand that small business taxation requires specialized knowledge and attention to detail, which is why we go above and beyond to ensure our clients receive the guidance and support they deserve.
Tailored Solutions for Every Client: Whether you're a high-net-worth individual seeking comprehensive tax planning or a small business owner in need of accounting and bookkeeping assistance, we have the expertise to meet your needs. Our team takes the time to understand your specific situation and develop customized solutions that align with your goals and objectives.
Why Choose Us?: What sets us apart from other New Jersey tax firms is our commitment to excellence and innovation in the field of taxation. We don't just prepare tax returns; we provide strategic insights, proactive planning, and actionable advice to help our clients achieve their financial goals. With a team of two CPAs, an EA, and an ERO, we have the expertise and resources to deliver exceptional service and results.
Your Success is Our Priority: At Prestige Accounting Services Group (previously Prestige Wealth Accounting Group), we measure our success by the success of our clients. We are dedicated to building long-lasting relationships, providing unparalleled service, and helping our clients thrive in today's ever-changing tax landscape.
We can't wait for you to experience the Prestige Accounting Services Group (previously Prestige Wealth Accounting Group) difference.
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