Q. I have had nine furlough days required to be taken in 2020 and will have another eight furlough days to be taken in 2021. I took a 401(k) distribution on Jan. 7, 2020 and $9,000 in taxes was already withheld. I plan a second distribution this week for $10,000. Will this be covered under the CARES Act?
A. The CARES Act allows for withdrawals of up to $100,000 from your retirement accounts for coronavirus-related reasons.
It sounds like you may be eligible for a CARES Act distribution for 2020 because you suffered financial hardship as a result of the COVID-19 pandemic, said Michael Cocco, a certified financial planner with Beacon Wealth Partners in Nutley.
He said the CARES Act would waive the 10% premature withdrawal penalty normally assessed on distributions taken by people under the age of 59 ½ if you are a qualifying person.
But you would still owe taxes on the withdrawal.
Cocco said you may elect to spread the taxes over a three-year period with at least one-third of the taxes due being paid each year.
“If you are able to put the money back by the end of the third year, you would be able to file an amended return and potentially receive those taxes back by amending your return to not include those taxable distributions,” he said.
The IRS will look at your total CARES-related distributions for 2020 and lump them together for purposes of their calculation, so whether someone took ten $10,000 withdrawals, or one $100,000 withdrawal, they would have the same end result, he said.
“You are allowed to pay back part of the distribution and amend your return to remove a portion of the taxable distribution,” he said.
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Karin Price Mueller writes the Bamboozled column for NJ Advance Media and is the founder of NJMoneyHelp.com. Follow NJMoneyHelp on Twitter @NJMoneyHelp. Find NJMoneyHelp on Facebook. Sign up for NJMoneyHelp.com’s weekly e-newsletter.