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No risk if you qualify for a COVID-19 related distribution, possible tax fraud if you do not. A COVID-19 related distribution eliminates any early distributions penalty and allows 3 years to spread the tax over or repay (roll back) within 3 years).
A3. You are a qualified individual if –
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.
I was diagnosed with Covid 19 in July so I do qualify then. I just want to withdraw my 401k and they offered this option. Just wanted to make sure it did not affect me. What are the differences with the two forms? What does it have to do with State taxes? And does it just extend the time I have to pay taxes for this for upto three years?
@juan27026 wrote:
I was diagnosed with Covid 19 in July so I do qualify then. I just want to withdraw my 401k and they offered this option. Just wanted to make sure it did not affect me. What are the differences with the two forms? What does it have to do with State taxes? And does it just extend the time I have to pay taxes for this for upto three years?
I don't know what two forms you are referring to - most likely an local form your employer supplies - ask them (there is no special IRS form to take a COCID-19 related distribution).
I don't know about state tax - there are 50 states, all different.
See this IRS FAQ for your questions. (Q6 for the 3 year period).
When you leave employment from a job, you are permitted to withdraw your 401(k) (take a distribution), or rollover or transfer the money to a different qualified plan like a private IRA or retirement plan at your new employer. You don't have to certify for COVID. If you are under age 55, and you take a distribution, you pay income tax plus a 10% penalty on your tax return, and the plan administrator is required to withhold 20% for taxes. The 20% is not the total tax bill, it is a backup amount, and the actual tax and penalty is calculated on your tax return.
If you can certify that your distribution is due to a COVID hardship, then you don't have to pay the 10% penalty on your tax return, and you don't have the mandatory 20% backup withholding. The plan's "COVID form" is probably used to exempt you from the mandatory 20% withholding.
Note that this does not change your ultimate tax owed, just when you pay the tax. If you can certify on your tax return that your withdrawal was due to a COVID hardship, you can spread the income out over 3 years, or you can take all the income at once and pay the tax all at once. If we assume that you withdrew the maximum of $100,000, and spread it out over 3 years, your income tax will still probably be $8000 higher than last year, and you will need to come up with that money out of pocket if you don't have the mandatory withholding.
Big difference between withdrawal and trustee transfer to your own IRA.
If you withdraw you will pay tax and lose that portion of your retirement nest egg.
I can't think of any reason your employer needs to know your withdrawal is covid-related,
unless they have some plan to adjust the withholding amount.
I can't think of any reason your employer needs to know your withdrawal is covid-related,
Withdrawals under the CARES act are not subject to the mandatory 20% withholding.
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