Cares ACT withdrawal from ROTH IRA

[Matt 126]

Hi there, I currently am in the 12 percent tax bracket and I make approximately 40000 on an annual basis. I need to take the COVID 19 distribution from my ROTH 401k, which will be 5000.00. I understand that this can be spread out into 3 years. I am on the brink of the 22 percent bracket, so my question is do I have to pay taxes on the ROTH when I get this 5000 distribution from this new CARES act or is it exempt since I already paid taxes on this since it's a ROTH 401k

[CatinaT1]

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rule and/or are withdrawing any investment earnings, you generally incur a 10% penalty on that growth you have withdrawn.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 The contributions you’ve made can be withdrawn at any time because you’ve already paid taxes on this money.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• Have had a job offer rescinded or a job start date delayed due to COVID-19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

[Matt 126]

You are great thank you so much for your valuable time and effort. So I proceeded, and 5000, there seems to still be a FED tax of 200.00. So I am not sure that this is?

[Matt 126]

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!

[Opus 17]

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. 

[Opus 17]

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@Matt 126 wrote:

You are great thank you so much for your valuable time and effort. So I proceeded, and 5000, there seems to still be a FED tax of 200.00. So I am not sure that this is?

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Are you talking about withholding?  Your plan trustee may withhold tax as required by law.  That is not the eventual tax you owe, it is an estimate.  Your actual tax is calculated on your tax return and you get credit for any withholding.  If your your total payments and withholdings (from all your jobs, this withdrawal etc.) is more than your overall tax (from all income and deductions) that's where refunds come from.  

I believe the CARES act allows you to not pay the normal mandatory withholding at time of withdrawal, but you would have to contact your plan trustee about that.  That doesn't change your tax anyway, just when you pay it. 

[Matt 126]

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. 

[Opus 17]

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@Matt 126 wrote:

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. 

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On your tax return, you will just check a box that you qualify for the exception.  If audited, you would need a reasonable argument to convince the auditor.  Most people are never audited. 

[Matt 126]

Thank you, so does this get added as income for the end of the year? So if I make 40k it would be 45K? Or is it just the earnings they tax?

Thanks again!

[Opus 17 · Accepted solution]

All your taxable income is reported on one tax return at the end of the year.  But remember, withdrawal of original Roth contributions is not taxable income, only withdrawal of the earnings, if certain situations apply.  

[dmertz]

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.

[Heliopolis]

I can't seem to locate on Turbotax just where to "check the box" that I qualify for the exception.  Do I create my own 1099R? I already received the Roth IRA and 401(k) CARES act distributions.  Thanks

[ZachNovak]

The IRS FAQ page regarding covid withdrawals say that income can be reported evenly over the course of 3 years.

[macuser_22]

That is done on the new 8915-E form.

The TurboTax 8915-E should be available on Feb. 25 (pending IRS approval by then). Updates are usually at night so check on the 26th.

See the forms availability list:
https://ttlc.intuit.com/community/forms/help/irs-forms-availability-table-for-turbotax-individual-pe...

The IRS just finalized the form on Feb 11. TurboTax must now submit their 8915-E software to the IRS for testing to be sure that both TurboTax and the IRS e-file computer are compatible. That process usually takes the IRS 2-3 weeks for approval to release the new form to the public.

See below for a link to sign up for an email when the form is ready.

This form is necessary to report COVID related distributions from IRA's and other retirement plans to report the distribution, pay it back over 3 years or spread the tax over 3 years.

A COVID-19 related distribution is reported on a new 8915-E form.

See this TurboTax FAQ to sign up for an e-mail when the form is ready.
https://ttlc.intuit.com/community/tax-topics/help/why-am-i-getting-getting-a-10-penalty-on-my-1099-r...

The TurboTax 8915-E should be available on Feb. 25 (pending IRS approval by then). Updates are usually at night so check on the 26th.

See the forms availability list:
https://ttlc.intuit.com/community/forms/help/irs-forms-availability-table-for-turbotax-individual-pe...

The IRS just finalized the form on Feb 11. TurboTax must now submit their 8915-E software to the IRS for testing to be sure that both TurboTax and the IRS e-file computer are compatible. That process usually takes the IRS 2-3 weeks for approval to release the new form to the public.

See below for a link to sign up for an email when the form is ready.

This form is necessary to report COVID related distributions from IRA's and other retirement plans to report the distribution, pay it back over 3 years or spread the tax over 3 years.

A COVID-19 related distribution is reported on a new 8915-E form.

See this TurboTax FAQ to sign up for an e-mail when the form is ready.
https://ttlc.intuit.com/community/tax-topics/help/why-am-i-getting-getting-a-10-penalty-on-my-1099-r...

[Matt 126]

I thought there was no tax penalty for covid withdrawal.