Cares ACT withdrawal from ROTH IRA

A Roth IRA has tax-free growth as long as you've owned your account for 5 years and you're age 59½ or older when you withdraw your money. 

If you make a withdraw prior to meeting the five-year rule and/or are withdrawing any investment earnings, you generally incur a 10% penalty on that growth you have withdrawn. This specifically applies to investment earnings. The contributions you’ve made can be withdrawn at any time because you’ve already paid taxes on this money.

What the Cares Act is doing is providing relief from any penalty, either due to the 5 year rule or age, for Covid related reasons.

So regardless, you will not pay tax on any withdraw from a Roth IRA, but the penalty is what you are possibly avoiding if you meet the Care Act guidelines for early withdraw.

Legislation restricts relief to qualified participants with a valid COVID-19 related reason for early access to retirement funds. These include:

• Being diagnosed with COVID-19
• Having a spouse or dependent diagnosed with COVID-19
• Experiencing a layoff, furlough, reduction in hours, or inability to work due to COVID-19 or lack of childcare because of COVID-19
• Have had a job offer rescinded or a job start date delayed due to COVID-19
• Experiencing adverse financial consequences due to an individual or the individual’s spouse’s finances being affected due to COVID-19
• Closing or reducing hours of a business owned or operated by an individual or their spouse due to COVID-19

Now if it was a PRE tax 401k what would there be a 10 percent withholding on that then? and that's it? I just don't want this to be added in as income in the end of the year.

Thank you so much!

You can always withdraw your Roth IRA principal contributions without tax.  The withdrawal ordering rules assume you always withdraw contributions first, if you have any in the account. 

If you withdraw investment earnings and the account is less than 5 years old or you are under age 59-1/2 (or both), you will owe income tax and a 10% penalty on the earnings only.  The CARES act exempts you from the 10% penalty if you certify that the withdrawal was COVID-related, and allows you to spread the income tax over 3 years if you want to. 

Unless you have previously withdrawn all your original contributions, you might not owe any tax on only a $5000 withdrawal. 

Not sure how I prove that I had financial hardships though. I was on cohorts with 2 weeks off and 2 week on for about 4 months and that effected my sales performance and money that was supposed to be earned for me at the end of the quarter, even though I did get paid for the time off for the 2 weeks, I am not sure how that would work or if they would require any proof of hardship. 

Unlike distributions from a Roth IRA, distributions from a Roth 401(k) are a proportionate mix of contribution basis and earnings, so if value of your Roth 401(k) account is more than the amount of your contribution basis, some portion of the distribution will be taxable.  Normally the taxable amount would be subject to 20% mandatory tax withholding, but that has been waived for distributions that qualify as Coronavirus-Related Distributions.  Of course you'll still own the income tax on this amount calculated on your tax return and you might need to have some withheld for taxes or pay estimated taxes to avoid a tax underpayment penalty for 2020.

To determine if any of this distribution will be taxable in the 22% tax bracket, you'll need to determine the taxable amount of the distribution and add that to what your taxable income would otherwise be.  Also, if any of your income is taxable at long-term capital gains, the marginal tax rate will probably be higher than the tax-bracket rate.  You would need to prepare an estimated 2020 tax return to get a better handle on the actual increase in tax liability resulting from the CRD.

There is no 10% early withdrawal penalty for COVID withdrawal but the distribution is taxable. You can choose to split your taxable amount of your distribution over a three-year period though because of COVID 19.