COVID-19 early withdraw

[Billygoch]

I got money out of my 401k in June. Left a job and got a new one because of loss of hours. I didn’t know about the cares act at the time and they took the 20 percent off the top. I now learned that I don’t have to pay the initial 20 percent and the 10 percent at time of filing. I called my plan administrator and he basically told me it’s too late it’s gone. My question is when I do my taxes and claim my withdraw covid related is it possible to reclaim that money? Or is it just gone like a normal early withdraw. Thanks.

[VolvoGirl]

Yes you will get credit for it on your tax return.  Just like withholding from your paychecks.  You will get a 1099R form for it.  The gross amount (before the withholding) will be taxable.  Hopefully the 20% will cover the tax on the withdrawal.  So you might get a refund or owe some more.  If it is a Covid-19 related withdrawal you might avoid the extra 10% Early Withdrawal Penalty.

[Opus 17]

First of all, you always owe regular income tax on a 401(k) withdrawal. The CARES act just eliminates the 10% penalty for early withdrawal if you can certify that the withdrawal is due to a Covid related hardship. Your regular income tax rate may be 15%, 22%, or higher, so the mandatory 20% withholding might not even cover your regular income tax much less the penalty.

Second of all, the income tax you owe is only calculated on your tax return. Any withholding during the year is only an estimate. You get credit for that withholding, and if your total withholding is more than your total tax you get a refund. If your total withholding is less than your total tax, you owe an additional payment. The 20% mandatory withholding on a 401(k) withdrawal is never the end of the story.

Finally, you have the option of spreading the income from a Covid related withdrawal over three years. This will all happen on your tax return, although the module is not ready in TurboTax yet. If you choose to spread the taxes out over three years, you will owe less than the withholding amount for this year, and therefore you will get the difference back as a tax refund. However, you will then owe additional tax for the next two years and you need to make plans to pay that, you can’t just forget about it and it doesn’t go away.

[Costco Shopper81]

How do you certify that the withdrawal due to a Covid related hardship? Everyone and their grand mother is going through a covid-19 hardship. Everyone is spending more money they don't have on extra precautions so they don't get sick or if they were sick that they stay home and order from some expensive delivery service for no contact delivery trying to quarantine themselves from everyone else.  A normal grocery bill that costs $100 now costs $160 plus a 20% tip to the guy or girl delivering your order and before you know it, you just doubled your cost. On a tight budget while quarantining yourself every time you feel a cold come on and don't know if it's something more sever because your short of breath and you think it might be a symptom being high risk you over react. You don't have a positive covid-19 test, but you have definitely been effected so much you can't even pay your mortgage. How do you self certify yourself in this case?

[CatinaT1]

The qualifications for retirement plan relief due to the Coronavirus is very specific.

You are a qualified individual if –

• You are 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;

• Your spouse or dependent is diagnosed with SARS-CoV-2 or with COVID-19 by a test approved by the Centers for Disease Control and Prevention;

• You experience adverse financial consequences as a result of being quarantined, being furloughed or laid off, or having work hours reduced due to SARS-CoV-2 or COVID-19;

• You experience adverse financial consequences as a result of being unable to work due to lack of child care due to SARS-CoV-2 or COVID-19; or

• You experience adverse financial consequences as a result of closing or reducing hours of a business that you own or operate due to SARS-CoV-2 or COVID-19.

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.

Additional information on Corona Relief - Coronavirus Relief

[Pebbles21]

I have claimed my qualified Cares Act 401k withdrawal on my income but I do not see the Cares Act as an option on the 10% penalty.  The only place to exclude it is under "other". Is this correct?

[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.

[Opus 17]

This section of the form isn't ready yet, we don't have a date but possible mid-February.  I would delete the 1099-R and re-enter it when the form is programmed.