Taking ROTH 401K Distribution under CARES Act

Forum|Forum|5 years ago
November 18, 2020
2 replies
0 views

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!

Best answer by Opus 17

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.

O

Opus 17

Answer

Level 15

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.

B

backuscmAuthor

Level 2

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?

O

Opus 17

Level 15

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.

M

Mario_21

Level 2

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?

S

svelure

Level 2

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.