Under the CARES Act, individuals impacted by COVID-19 will not be subject to penalties in 2020 for early withdrawal, and are not required to take their minimum distribution, among other changes.
Retirement Account Suspensions/Loans
- No one will be required to take their required minimum distribution (RMD) in 2020.
- This applies to all taxpayers who are otherwise required to take an RMD in 2020.
- Individuals who need to take money from a retirement account before age 59½ will not be subject to the usual 10% penalty in 2020.
- The distribution amount withdrawn is subject to taxes; however, if the distribution is paid back within three years, the individual can file for a refund of the taxes paid on that distribution.
- The income from the amount withdrawn can be claimed all at once in 2020 for tax purposes or spread out evenly over the next three years, which may be prudent as it is less likely to bump the person into a higher tax bracket in any single year.
- The maximum loan an employee can withdraw is $100,000 from employee-sponsored retirement accounts, such as 401(k)s and 403(b)s, as well as personal retirement accounts, such as traditional individual retirement accounts or a combination of these, during the COVID-19 pandemic.
- Individuals who have experienced adverse financial consequences because they have been quarantined or furloughed, or because their hours were cut;
- Individuals who have not been able to work because they had to stay home to care for children;
- Business owners who have had to reduce hours or close down due to the COVID-19 emergency;
- Individuals who have been diagnosed with COVID-19 or have experienced financial hardship from quarantine, layoffs, reduced hours, or are furloughed between now and December 31, 2020.
Withdrawing from investment accounts after the market has fallen means you are locking in your losses. Every dollar withdrawn means less in retirement due to compounding interest. Even if funds are reinvested in the future, the individual will have missed reaping any gains the investments would have gained during the interim.