Workers Can Tap IRAs To Cope With Coronavirus Finances

American workers under the age of 59½ generally haven’t been able to reach into their IRAs without paying stiff penalties. But the federal government temporarily has changed that in the throes of the coronavirus epidemic.

In March, the CARES Act (Coronavirus Aid, Relief and Economic Security Act) opened retirement plans to as much as $100,000 worth of penalty-free withdrawals for coronavirus victims. That gives workers and their families another lifeline from their own funds to endure the emergency, even if many would view it as a last resort. By the way, the temporary change also is available from some other retirement vehicles offered by employers, such as 401(k)and 403(b) plans.

Who’s eligible?  Just about anyone who has suffered financially because of the virus. Specifically,

  • Anyone who has been diagnosed with COVID-19 or whose spouse or dependent has been diagnosed.
  • Anyone whose finances were disrupted because of being quarantined, furloughed or laid off, or had hours reduced at a job because of the virus.
  • Parents or guardians who could not work because of lack of child care during this time.
  • Business owners who suffered financially because of closings or reduced hours of their enterprises due to COVID-19.

If they need to tap their IRAs/retirement plans, those workers now can withdraw as much as $100,000 without paying a required 10 percent penalty for an early distribution.

If the distribution is repaid to the IRA within 3 years, the Internal Revenue Service treats it as a rollover. That means no federal income tax will be due.

If it is not repaid, the emergency distribution will trigger normal federal income taxes. However, the IRS is allowing workers to stretch the taxes over a three-year period from tax year 2020 through 2022. Basically, they can report a third of the distribution as income each year.

Workers can take advantage of the special coronavirus rules through Dec. 30 this year, the IRS says. For more specifics, see  https://www.irs.gov/newsroom/coronavirus-related-relief-for-retirement-plans-and-iras-questions-and-answers .

Eric Buechler, founder of EricJohn Ltd. and an IRS-recognized enrolled agent, also can guide workers wanting to take advantage of this special coronavirus provision.

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