401k Early Withdrawal 2020

[liquidexpert]

Hello,

I wanted to confirm that if I withdraw my 401k in 2020 (early withdrawal) that there would be zero 10% penalty for the first $100,000 based on the stimulus package recently approved? I don't need to "qualify" for anything, correct? The "no early penalty" applies to all withdrawals?

Also, how does the "pay the taxes over three years" piece work?

Thanks,

Brian

[dmertz]

The early-distribution penalty is eliminated only on early-distributions that qualify as coronavirus-related distributions.  Distributions that do not qualify are still subject to the early-distribution penalty unless one of the permanent exceptions applies:

(A) CORONAVIRUS-RELATED DISTRIBUTION.—Except as provided in paragraph (2), the term “coronavirus-related distribution” means any distribution from an eligible retirement plan made—

(i) on or after January 1, 2020, and before December 31, 2020,

(ii) to an individual—

(I) who is 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,

(II) whose spouse or dependent (as defined in section 152 of the Internal Revenue Code of 1986) is diagnosed with such virus or disease by such a test, or

(III) who experiences adverse financial consequences as a result of being quarantined, being furloughed or laid off or having work hours reduced due to such virus or disease, being unable to work due to lack of child care due to such virus or disease, closing or reducing hours of a business owned or operated by the individual due to such virus or disease, or other factors as determined by the Secretary of the Treasury (or the Secretary's delegate).

Similar to Forms 8915-A and 8915-B for qualified disaster distributions, the IRS will certainly need to introduce a new form for optionally spreading the income of a coronavirus-related distribution equally over the 2020 through 2022 tax years.

[liquidexpert]

Do you know how one is to prove they qualify? For example, if my wife is unable to work due to lack of child care, how would I prove this during the 2020 tax season? 

Thanks so much

[dmertz]

I suspect that proof would only be required if your tax return gets audited.  Retain in your tax records any information needed to support your claim.

[SteamTrain]

Also....if you had made Child Care payments before this all started...keep printed/dated records of those payments in a folder too  (Check cancellations, bank account, or Charge account statements printed out)...to show that you were paying for childcare earlier.

[adamathome]

How will turbo tax 2020 work to allow me to designate a withdrawal was covid related and not something else so that the penalty does not apply?

[dmertz]

2020 TurboTax will include IRS Form 8915-E and the questions necessary to prepare that form, similar to those for qualified disaster distributions.

https://www.irs.gov/pub/irs-dft/f8915e--dft.pdf

[zoran0512]

Yes I am trying to figure out how much taxes to hold back on a 401k C19 related early withdraw also. I found out my fund can withhold federal taxes BEFORE giving me my portion so this helps with paying the tax.....but how much to hold back? The chart here seemed helpful but not sure if this is implying the withdraw amount ONLY? If so, let's say I'm planning to take out 5k, then should I hold back 10% (will file married filing seperately). Thank you!

https://www.bankrate.com/finance/taxes/how-are-401k-withdrawals-taxed.aspx/amp/

And then I'm trying to decide if paying all the tax up front for 2020 in 2021 makes the most sense OR spread the withdraw tax over 3yrs makes more sense on the 401k withdraw portion?.....thank you!

[dmertz]

You can use the download version of 2020 TurboTax, available for purchase now, to simulate your tax return in various ways to determine the approach that makes the most sense for you.  However, the retirement section of TurboTax's step-by-step entry method is not yet available, so you would have use forms mode to enter the Form 1099-R that represents this distribution.  Also, support for Form 8915-E for reporting CRDs is not yet functional, so you'll need to enter it as a 2019 disaster distribution for which TurboTax will prepare Form 8915-D which implements the same rules as those for a CRD.  You'll be able to use the checkbox on line 9 of Form 8915-D to indicate whether you want to include the distribution entirely in 2020 income or spread it in equal parts over three years.

[r3kings1]

when will form 3915 be available? 

[r3kings1]

I just completed a mock review of my taxes and I am being penalized for the early withdrawl.  it does not give me the option online to select any Covid 19 

[CatinaT1]

You will report this on a Form 8915-E.  The IRS has not yet finalized the Form 8915-E for retirement plan distributions under the CARES act.  So this form cannot be included in the TurboTax program.  You will not be able to proceed until the form is available.

The IRS has not communicated when the form will be finalized for inclusion on the 2020 federal tax return.

We estimate it will be sometime in February 2021 before the form is available.  You can watch this link for the form availability.  Currently, the form is not listed here since there is no estimated date.  Once there is, you will find the form listed with the date available.  

IRS forms availability table for TurboTax individual (personal) tax products

Additionally, the IRS will not start processing returns until February 12, so waiting for this form is not slowing down the processing of your return.

[SuperMombie]

Thank you for that; it would be nice if the software actually tells you this since it is currently allowing me to file with the incorrect information, causing me to owe instead of receive a return from the state. 

[p30amg08]

I am waiting on this as well. as of 1.31.21 it is not available, just as a draft on the irs website.

[AThompsonCO2009]

When I go to the FAQ it states the form isn't finalized but my financial institution is telling me I need to file it.