Sign Up

Why sign in to the Community?

  • Submit a question
  • Check your notifications
or and start working on your taxes
cancel
Showing results for 
Search instead for 
Did you mean: 
Ukcat85
Returning Member

401k withdrawal Cares Act

I am considering taking out about $50k in 401k due to the fact that I lost my job in May. Now I did get a job shortly thereafter, but I am the only one that works, as my wife is a stay-at-home Mom, and while the salary is nice, we depend on commissions as well. Since leaving one job affected by Covid and starting the new one, commissions have been fewer and far between. The salary isn’t enough to cover the bills and wanting to pay off a few credit cards to lower the monthly bills. The two 401k’s I am looking to take from are past companies I had worked for. Neither took the Cares Act money and Voya is telling me that if they didn’t take the money then I won’t be eligible to get the 10% penalty waived. Is there any way as an individual affected by the pandemic that I can have the 10% fee waived when it comes tax time in 2021?

7 Replies
Critter-3
Level 15

401k withdrawal Cares Act

What the company did or did not do has nothing to do with the individual penalty exemption. 

 

 

Opus 17
Level 15

401k withdrawal Cares Act

If you take an early withdrawal, you will be required to certify on your tax return that you are exempt from the penalty because you meet one of the reasons outlined in the CARES act.  Who the plan trustee is has nothing to do with it.

 

Incidentally, if you are unhappy with the 401(k) plans, you can always do a transfer of funds to a private IRA that you can set up with any bank or broker (if you are separated from the sponsoring employer).  As long as you do a direct institutional transfer, there is no tax impact at all.  You will have more investment options in a private IRA; on the other hand, the plan fees may be higher.

*Answers are correct to the best of my ability at the time of posting but do not constitute legal or tax advice.*
Ukcat85
Returning Member

401k withdrawal Cares Act

Ok thanks. So, call Voya and request the withdrawal and have them take out the required taxes? Then, plan on filling out something in TurboTax showing a hardship from Covid and I will not incur the 10% early withdrawal penalty? Is this seen as additional income that I will be taxed on? 

Opus 17
Level 15

401k withdrawal Cares Act


@Ukcat85 wrote:

Ok thanks. So, call Voya and request the withdrawal and have them take out the required taxes? Then, plan on filling out something in TurboTax showing a hardship from Covid and I will not incur the 10% early withdrawal penalty? Is this seen as additional income that I will be taxed on? 


Withdrawals from a traditional (pre-tax) IRA or 401(k) are always subject to regular income tax.  Go ahead and let the trustee keep the mandatory 20% withholding.  You will get a 1099-R at the end of the year (mailed out by Jan 31) and you will report the income and the withholding on your tax return along with all your other income, withholdings, deductions and credits.  Your overall tax bill is calculated and compared to your overall withholdings and payments.  If you paid more into the system than your tax, you will get a refund and if you did not pay enough into the system, you will owe the additional tax.

 

The difference here is that there won't be an additional 10% tax on the 401(k) withdrawal if you certify it is COVID-related (up to $100,000).  

 

To estimate the impact of the withdrawal on your taxes, you can use the Turbotax TaxCaster.

TaxCaster tax calculator

 

You are probably in the 15% or 22% federal tax bracket, plus your state taxes (4%-10% depending on which state), so the mandatory 20% withholding probably won't quite cover the taxes you will eventually owe, but that depends on all your other income, withholding, deductions, dependents, and payments. 

 

 

*Answers are correct to the best of my ability at the time of posting but do not constitute legal or tax advice.*
solymarley916
New Member

401k withdrawal Cares Act

@Opus 17 Question for you. How do I certify to not be penalized for my 401k withdraw. I checked Cares Act when I withdrew and got taxes taken out as well.

dmertz
Level 15

401k withdrawal Cares Act

You claim the distribution as being a coronavirus-related distribution (CRD) by filing Form 8519-E with your tax return and signing your tax return to attest that you qualify.  TurboTax has not yet implemented Form 8915-E because the IRS has not yet released the final version of the form, so you'll need to wait for that to part of TurboTax be completed before completing the entry of the corresponding Form 1099-R and filing your tax return.  In the unlikely event that when processing your tax return the IRS questions your assertion that you qualified for a CRD, the IRS will ask for an explanation of how you qualified.

Opus 17
Level 15

401k withdrawal Cares Act

That section of the program is not ready yet, and we do not know when it will be ready. You’ll have to be patient this year, there were so many last-minute text changes due to coronavirus relief, if the IRS has no delayed the opening of the tax season by two weeks themselves. The IRS will not even begin to start processing returns until February 12

*Answers are correct to the best of my ability at the time of posting but do not constitute legal or tax advice.*
Dynamic AdsDynamic Ads
Privacy Settings
v