by Paul Adams, Founder/CEO of Sound Financial Group and C3 Member
We have seen our country go through unprecedented change in 2020. Along with a contentious presidential election that seems to have gone into overtime, we have been faced with the challenges of a global pandemic. This unprecedented pandemic came with some unprecedented action on the part of our federal government that many of us can benefit from.
When our nations representatives came together and enacted the CARES Act to help with PPP and EIDL emergency funds for business they also approved a special type of distribution you can make from your 401k or IRA before the end of 2020.
The new rule allows a person to take out up to $100k from their pre-tax 401k and IRA accounts, waive the usual 10% penalty for those under age 59.5, and recognize the income in thirds over the next 3 years. First let me walk you through the law, then I will walk you through how we have helped clients use the law.
First, you do have to qualify for this distribution, though as you will see nearly every private sector employee or business owner has qualified this year. You must answer at least one with “yes” in order to qualify for a CARES Act distribution. To download our one page graphic and guide to this strategy click here.
- Have you been diagnosed with COVID-19?
- Do you have a spouse or dependent that has been diagnosed with COVID-19?
- Have you experienced a layoff, furlough, reduction in hours, or inability to work due to COVID-19 or lack of childcare because of COVID-19?
- Have you had a job offer rescinded or a job start date delayed due to COVID-19?
- Have you experienced adverse financial consequences due to an individual or the
individual’s spouse’s finances being affected due to COVID-19?
- Closing or reducing hours of a business owned or operated by an individual or their spouse due to COVID-19?
As long as you have answered yes to one of the above you can take $100,000 from your retirement plan and your spouses plan if you so choose. For each $100,000 you take out you will have income recognition of $33,333.33 each year for the tax year 2020, 2021 and 2022. They also waive the 10% penalty due for those taking the distributions while still under 59 ½ .
This may come in handy if:
- Your business experienced a slow-down this year, and you anticipate a year or two of lower taxable income. and want to get some of the qualified plan money out.
- You are near to paying off the mortgage on your house.
- You are considering buying real estate and looking for liquid capital or funds for a down payment.
- You would like to make a significant charitable gift from your retirement funds this year.
- You want to use this opportunity to convert part of your pre-tax qualified plan to a tax free ROTH.
If you would like to learn more about that last point, you can review our one page graphic and explanation here. Simply said you can use the CARES Act COVID Related Retirement Plan distribution to pay the tax due from the IRS and move the remaining money to ROTH. The IRS has literally created a special window in time where you can use the money already owed to the IRS to pay the tax due on the conversion.
Years like 2020, when our world and our country have been through so much disruption, that we are reminded of the important of having a financial team watching for every opportunity the law allows to help build your work optional lifestyle.
Paul Adams is the Founder/CEO of Sound Financial Group. Sound Financial Group is an Independent Registered Investment Advisory firm based in Washington State and can be reached at firstname.lastname@example.org or here on LinkedIn.
This blog has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. C3 Leaders, its staff, officers or volunteers, do not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.