The CARES Act provides tax relief for up to $100,000 of COVID-19 related distributions from eligible retirement plans. So, if you, your spouse, your dependent, or a member of your household was impacted by the coronavirus and you withdrew from your retirement accounts in 2020 before the age of 59 ½, you may not have to pay the 10% early withdrawal penalty (or the 25% additional tax for SIMPLE IRAs) with Form 8915-E. It also allows you to spread the taxable portion of the distribution over three years, if needed.
We'll complete and include Form 8915-E with your return if you qualify. Just enter your Form 1099-R and answer a few questions to determine your eligibility.
To qualify for Form 8915-E and to be exempt from the early withdrawal penalty due to COVID-19, a few rules have to be met.
1. You have to be a qualified individual. To qualify, one of these must be true:
- You, your spouse, or your dependent were diagnosed with COVID-19
- You experienced adverse financial consequences as a result of being quarantined, being furloughed or laid off, or having work hours reduced due to COVID-19
- You experienced adverse financial consequences as a result of being unable to work due to lack of child care due to COVID-19, or
- You experienced adverse financial consequences as a result of closing or reducing hours of a business that you own or operate due to COVID-19
2. The withdrawal had to come from an eligible retirement plan, which could be any of the following:
- A qualified pension, profit-sharing, or stock bonus plan (including a 401(k))
- A qualified annuity plan
- A tax-sheltered annuity contract
- A governmental section 457 deferred compensation plan
- A traditional, SEP, SIMPLE, or Roth IRA
3. The distribution had to have been made in 2020 before December 31, 2020.
There is also a $100,000 distribution limit to the exemption. Any distributions over that amount, may be subject to the additional tax.