401k cares act withdrawal

Forum|Forum|5 years ago
November 17, 2020
27 replies
82 views

I stopped working on September 5, 2020 and took out a cares act distribution for a vested balance of a little over $25k. I talked to a tax advisor and had fidelity hold the taxes but now I'm not sure if i actually qualified. I still had child care (my step dad coming to my house to watch our girls) at the time that I quit working but my job told us that as of october 1, 2020 we would need to have a private space and no excessive background noise. The only way that we would have been able to meet the space requirement would have been if the company had allowed my husband and I to work in the same room since he's just in another department of the same company. The company was still working out the details at the time of my resignation. Should i pay the 10% penalty? I've already used the money to pay off all of our student loans. How would i go about paying the penalty?

Best answer by Opus 17

@Coilylecross wrote:

is there a way to go back and pay the penalty after you've already taken the withdrawal?

All the taxes and penalties are figured on your income tax return. Any tax you have withheld is only an estimate -- if too little was withheld, you will pay more when you finish your tax return, if too much was withheld, you will get the difference as a refund.

On your tax return itself, you will report the 1099-R and you will be asked if this is a qualifying distribution under the CARES act, you will answer yes or no and the tax and penalties will be figured accordingly.

If you think that you will not certify this as COVID related, then you will owe regular income tax plus a 10% penalty. Since you said "we" it sounds like you are married, your income tax is probably in the 15% bracket or it could be the 22% bracket. That would mean a total tax of 25% or 32%, or about $6300 or $8000. If you had less than that withheld, and want to make an estimated payment now so you aren't in the hole on April 15, you can make a payment to your account at www.irs.gov/payments. Be sure to select "2020 estimated tax" as the reason for the payment. When you prepare your tax return, be sure to list the estimated payment and the date in the tax program. You will get credit for the payment and your ultimate refund or tax bill will be determined. (Note that if you usually get a refund of $3000 and your tax situation didn't;t change, you might only need to make an estimated payment of $3200 or $5000 to square up.)

You can use the TaxCaster or the IRS withholding calculator to estimate your tax that will be due.

https://turbotax.intuit.com/tax-tools/calculators/taxcaster/

https://turbotax.intuit.com/tax-tools/calculators/tax-bracket/

https://www.irs.gov/individuals/tax-withholding-estimator

macuser_22

Alumni - Champ

Here are the qualifications:

Q3. Am I a qualified individual for purposes of section 2202 of the CARES Act?

A3. You are a qualified individual if –

You are 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;

Your spouse or dependent is diagnosed with SARS-CoV-2 or with COVID-19 by a test approved by the Centers for Disease Control and Prevention;

You experience adverse financial consequences as a result of being quarantined, being furloughed or laid off, or having work hours reduced due to SARS-CoV-2 or COVID-19;

You experience adverse financial consequences as a result of being unable to work due to lack of child care due to SARS-CoV-2 or COVID-19; or

You experience adverse financial consequences as a result of closing or reducing hours of a business that you own or operate due to SARS-CoV-2 or COVID-19.

Under section 2202 of the CARES Act, the Treasury Department and the IRS may issue guidance that expands the list of factors taken into account to determine whether an individual is a qualified individual as a result of experiencing adverse financial consequences. The Treasury Department and the IRS have received and are reviewing comments from the public requesting that the list of factors be expanded.

https://www.irs.gov/newsroom/coronavirus-related-relief-for-retirement-plans-and-iras-questions-and-answers

The tax that you will owe is the tax on ordinary income at your margional tax rate so to avoid an underpayment penalty you can make estimated tax payments.

The penalty is an additional 10% of the distribution amount that is added to the tax unless you are over age 59 1/2 or were over age 55 when you left service.

**Disclaimer: This post is for discussion purposes only and is NOT tax advice. The author takes no responsibility for the accuracy of any information in this post.**

Opus 17

Level 15

Only you can certify if your financial hardship was COVID-related as defined by the CARES act. No one else can do that for you.

CoilylecrossAuthor

Level 2

is there a way to go back and pay the penalty after you've already taken the withdrawal?

macuser_22

Alumni - Champ

As I said, by paying estimated tax.

https://www.irs.gov/payments/pay-as-you-go-so-you-wont-owe-a-guide-to-withholding-estimated-taxes-and-ways-to-avoid-the-estimated-tax-penalty

https://www.irs.gov/newsroom/dont-wait-for-the-due-date-schedule-or-pay-federal-taxes-including-estimated-and-other-tax-payments-now

**Disclaimer: This post is for discussion purposes only and is NOT tax advice. The author takes no responsibility for the accuracy of any information in this post.**