What are the current tax implications for early wi...
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What are the current tax implications for early withdrawal of Roth 401(k) considering the CARES act and a maximum amount of $100,000. Will there be any penalties?

 
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Employee Tax Expert

What are the current tax implications for early withdrawal of Roth 401(k) considering the CARES act and a maximum amount of $100,000. Will there be any penalties?

Penalty Waived for Early Retirement Withdrawal

If you need to take money out of your retirement plan ASAP, keep in mind that the 10 percent early withdrawal penalty may be waived on up to $100K of retirement funds withdrawn if you are a qualified individual impacted by Coronavirus.  You are a qualified individual if:

  • You, your spouse, or dependent are diagnosed with Coronavirus 
  • You experience adverse financial consequences as a result of being quarantined, furloughed, or laid off
  • You had hours reduced due to Coronavirus
  • You are unable to work due to your child care closing or reducing hours

Additionally, income attributable to such distributions would be subject to tax over three years, and you may recontribute the funds to an eligible retirement plan within three years without regard to that year’s cap on contributions.

 

Please read this TurboTax article.

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Level 15

What are the current tax implications for early withdrawal of Roth 401(k) considering the CARES act and a maximum amount of $100,000. Will there be any penalties?

Well, first of all, if you are still employed by the plan sponsor, you can't make any withdrawal unless the plan sponsor allows hardship withdrawals.  This is allowed by the IRS but may not be allowed by your particular plan sponsor.

 

Then, if you are no longer employed by the plan sponsor or they do allow hardship withdrawals, you have to follow the 5 year rule and the age 59-1/2 rule.  A qualified distribution must be both after the account is opened at least 5 years AND you are over age 59-1/2.  If the distribution is not qualified, then a percentage will be deemed to come from the earnings and be subject to income tax, even if you withdraw less than your original contributions.  (This is different than a Roth IRA.)

 

The additional 10% penalty on non-qualified withdrawals is waived if you qualify for one of the exemptions in the CARES act.  You do not send proof to the IRS with your tax return, but keep the proof with your other tax papers for at least 3 years in case of audit.  

 

The CARES act also allows you to spread the tax payment over 3 years instead of all in 1 year, and it gives you 3 years to repay the distribution (put it back into your Roth 401(k) without paying tax on it.)

*Answers are correct to the best of my ability at the time of posting but do not constitute legal or tax advice.*
Level 15

What are the current tax implications for early withdrawal of Roth 401(k) considering the CARES act and a maximum amount of $100,000. Will there be any penalties?

If qualified for a distribution under the CARES act then it is not a hardship distribution, it is a CARES act distribution that a plan cannot deny if the employee self certifies that they qualify per §2202 of the act.

**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.**
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