During 2020, rules and procedures implemented under the Coronavirus Aid, Relief, and Economic Security (CARES) Act allowed individuals to take early distributions from certain retirement plans as a way to ease any financial burden they may have felt during the unprecedented times the country was facing. As we enter the heart of tax reporting season, we thought it important to let individuals know the reporting procedures surrounding any distribution they may have received from their eligible retirement plan related to the CARES Act and the COVID-19 pandemic. For your reference, IRS Notice 2020-50 clarifies the process for withdrawing eligible funds and provides guidance on the various tax-reporting options related to these transactions.
Under normal circumstances, a taxpayer withdrawing funds from a traditional retirement account before age 59½ may be subject to a 10% additional tax for early withdrawal. Due to the pandemic, the government recognized that people may need to rely on their retirement savings in order to survive during uncertain financial times. As such, provided certain conditions are met, under the CARES Act, early withdrawals taken in 2020 due to hardships that result from COVID-19 will not be subject to the 10% additional tax.
The conditions referenced above include the following:
The distribution must be made to a qualified individual.
The distribution must be from an eligible retirement plan between January 1, 2020 and December 31, 2020.
The aggregate of all distributions must be $100,000 or less.
Provided all these conditions are met, the eligible distributions must be reported as income and are subject to income tax, but without additional tax or penalty for early distribution.
If you are a qualified individual, the taxable portion of an eligible CARES Act distribution may be spread evenly over a three-year period starting with 2020 on your federal income tax return, unless you elect to have it all taxed in 2020.
You must use IRS Form 8915-E (Qualified 2020 Disaster Retirement Plan Distributions and Repayments) when filing your 2020 federal income tax return to claim the tax benefits for any CARES Act distributions.
Further, the taxable portion of your CARES Act distribution will be subject to 10% federal income tax withholding unless no withholding or additional withholding is elected. If applicable, your distribution may also be subject to state income tax withholding.
Your CARES Act distribution will be reported on IRS Form 1099-R, which will include information about the gross and taxable amount of your distribution and any applicable federal and state income tax withholding. As you may know, the information on IRS Form 1099-R is also reported to the IRS. The information on the 1099-R is used to prepare your income tax returns and to qualify for any income tax relief.
If you have any questions, please contact your tax preparer or your Schneider Downs Retirement Solutions representative for assistance.
Schneider Downs Wealth Management Advisors, LP (SDWMA) is a registered investment adviser with the U.S. Securities and Exchange Commission (SEC). SDWMA provides fee-based investment management services and financial planning services, along with fee-based retirement advisory and consulting services. Material discussed is meant for informational purposes only, and it is not to be construed as investment, tax or legal advice. Please note that individual situations can vary. Therefore, this information should be relied upon when coordinated with individual professional advice. Registration with the SEC does not imply any level of skill or training.
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Material discussed is meant for informational purposes only, and it is not to be construed as investment, tax, or legal advice. Please note that individual situations can vary. Therefore, this information should be relied upon when coordinated with individual professional advice.
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