Taking ROTH 401K Distribution under CARES Act

[backuscm]

Hello - I considering taking an early withdrawal distribution of $50,000 out of my existing roth 401k under the CARES distribution and trying to understand what my exposure will be.  To my understanding, assuming I am a qualified individual, my tax and fee exposure here will be $0?  Since it is a roth 401k... this will not count as additional income since I have already paid the taxes within the investment vehicle (hence $0 tax exposure)? and since this will be a CARES distribution, the 10% early withdrawal penalty is waived (hence why $0 fee exposure)?

Is this train of thought correct or am I missing something?

On a side note, does anyone know what documentation the IRS will ask me provide to prove I am qualified to withdraw under the CARES act?

Thank you!

[Opus 17 · Accepted solution]

No.  If you have a non-qualified withdrawal from a Roth IRA, it is subject to income tax plus a 10% penalty.  The CARES act lifts the 10% penalty but not the income tax.

You can withdraw your original taxed contributions tax free at any time, even without the CARES act.  But if you withdraw earnings, that is subject to the rules about qualified and non-qualified withdrawals.  A non-qualified withdrawal is a withdrawal that is made if you are under age 59-1/2, or if the Roth IRA has been open less than 5 years even if you are over 59-1/2.   Under the ordering rules for Roth IRAs, it is assumed that any money you withdraw first comes from contributions, then from rollovers and conversions, and lastly from earnings. 

IF you have more than $50,000 of contributions, you can withdraw that without tax or penalty and you don't need the CARES act.  If that withdrawal exceeds your original contributions and starts cutting into your earnings growth, that part which is earnings will be subject to regular income tax, but not the penalty if you file under the CARES act.

The tax form will likely just have a check box to claim the withdrawal under the CARES act.  We don't know what proof the IRS might ask for during audits and compliance review. 

[backuscm]

Hi Opus, Thank you for this explanation.  In your explanation, you referenced Roth IRA... I have a Roth 401k... but these would be subject to the same rulings mentioned in your below advise?

[Opus 17]

I believe the distribution rules are the same.  Any distribution of earnings is non-qualified if you are less than age 59-1/2.  non-qualified distributions are subject to income tax and the penalty and the CARES act only eliminates the penalty.  

[Opus 17]

My mistake.  With a designated Roth 401(k), the distribution is deemed to be pro rata from earnings and contributions.  So you will owe some income tax no matter what.  

https://www.irs.gov/retirement-plans/designated-roth-accounts-distributions

[Jen240sx]

So if I took a withdrawal out of my 401k under the cares act, do I have to claim it on this years taxes or can it be claimed next year?

[CatinaT1]

What year did you take the distribution?  2020 or 2021?  You will report it in the year of the distribution.  If you qualify for relief from the penalty under the Cares act, 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

Please sign-up here and we will email you once the form is live.

Additional information on Corona Relief - Coronavirus Relief

[Mario_21]

the 1099R form has a distribution code, however, it appears turbo tax does not have option to make the distribution as a cares act distribution.  Is anyone else running into this issue?  

[Mario_21]

Thank you, I wish Turbo tax would notify its users, so were not going in circles.  Im getting the penalty and could not get it removed even though my distribution is cares act

[DaveF1006]

At this point and time the Form 8915-E (Qualified 2020 Disaster Retirement
Plan Distributions and Repayments (Use for Coronavirus-Related Distributions)) is not finalized.

The 8915-E Form is projected to be e-fileable starting 02/24/2021

Please sign-up here and we will email you once the form is live.

[svelure]

YES!! I am running into this. I am freaking out because I used my 401k with cares act to help pay for bills while I was furloughed and now it is saying I owe 5 grand in taxes that I can't afford!! WHERE ARE THESE FORMS!? I need to know what I owe well before April 15th. I know this isn't TT's fault. But, the IRS needs to get it together- this passed last March- how are these forms not available yet!? It would be nice to get this tax bill down that I have been stressing over for about a month now.

[PattiF]

Yes, it is not good that the forms are not ready yet. 

Here is a link to the information from the IRS so you know what to expect when the forms are available next week.

CARES Act and Retirement

[Mario_21]

Check this out maybe you can spread the distribution over three years. 

https://www.irs.gov/newsroom/coronavirus-related-relief-for-retirement-plans-and-iras-questions-and-...

[ryanupson12]

i am in the same boat as you. cares act taking more from me than what i would have had else - considering market gains.