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Coronavirus Tax Planning Alert

(May 20, 2020, 8 p.m. ET) As mandated by the Coronavirus Aid Relief & Economic Security (CARES) Act on March 27, individuals harmed by the epidemic may make withdrawals from an IRA, 401(k) or 403(b) account before age 59½ without facing the usual 10% federally-imposed early withdrawal penalty.

On May 4, the IRS published an 1800 word statement which identified those individuals eligible for this special tax break and they subsequently promulgated special rules implementing Section 2202 of the massive CARES Act financial relief legislation.

A key section of the lengthy IRS statement says you are qualified for special tax treatment if:

  • You are diagnosed with the virus SARS-CoV-2 or with coronavirus disease 2019 (COVID-19) by a test approved by the Centers for Disease Control and Prevention;
  • Your spouse or dependent is diagnosed with SARS-CoV-2 or with COVID-19 by a test approved by the Centers for Disease Control and Prevention;
  • You experience adverse financial consequences as a result of being quarantined, being furloughed or laid off, or having work hours reduced due to SARS-CoV-2 or COVID-19;
  • You experience adverse financial consequences as a result of being unable to work due to lack of child care due to SARS-CoV-2 or COVID-19; or
  • You experience adverse financial consequences as a result of closing or reducing hours of a business that you own or operate due to SARS-CoV-2 or COVID-19

If you pay yourself back within three years, the new rules effectively enable you to give an interest-free, tax-free loan to yourself using your retirement savings. However, there is a major caveat: Borrowing from your retirement account at any time before you truly retire is a bad idea, and withdrawals which are taken but never paid back are an even worse idea. It's a giant financial step backward.

But if you have no other choice, tapping your retirement savings under the new law requires careful planning and forethought.

The IRS guidance implementing the CARES Act is effectively a newly enacted reform to U.S. tax law and we will keep you posted on its implementation in the weeks ahead.

This tax alert for individuals affected by the pandemic requires personalized tax and legal guidance beyond the scope of this article. If you have questions about CARES withdrawals from your retirement plan assets or IRA account, please contact our office with questions.

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This article was written by a professional financial journalist for Pacific Financial Strategies Inc and is not intended as legal or investment advice.

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