Do I owe penalties on an IRA withdrawal because of coronavirus?


Q. I’m 58 1/2 years old and I’m a self-employed 1099 worker. The pandemic has hurt business so I’m thinking of taking less than $10,000 from my traditional IRA to pay off my house, primarily to reduce the stress of coming up with the monthly payment during this time of uncertainty. If I was 59 1/2, I know I could do this without the 10% penalty, but can I do this with the CARES Act?
— Looking for help

A. We’re sorry to hear your business is hurting.

But you’re right. The Coronavirus Aid, Relief, and Economic Security Act — CARES Act — provided some options.

It allows for additional distribution options and favorable tax treatment for up to $100,000 of coronavirus-related distributions from eligible retirement accounts to qualified individuals, said Deva Panambur, a fee-only planner with Sarsi, LLC in West New York and an adjunct professor of personal finance at Montclair State University.

He said eligible accounts include certain employer retirement plans and other retirement accounts such as 401(k) plans, 403(b) plans and IRAs.

“Qualified individuals are those who have been diagnosed with the Covid 19, or whose spouse or dependent have been diagnosed by the disease, or who have suffered adverse financial consequence because of the pandemic,” he said.

The distributions can be included in income over a three-year period starting with the year in which you receive your distribution, he said.

You have the option of including your entire distribution in the year of the distribution, and there is no penalty on this distribution.

“You have the choice to repay all or part of the distribution to an eligible retirement account, provided you repay it within three years from the date the distribution was received,” Panambur said. “When you repay the distribution, you can claim a refund on the tax already paid on the distribution.”

So if you chose to not repay the distribution you will have to pay the tax on the distribution but cannot claim a refund.

“The disadvantage of not paying back the distribution is that you will have reduced the amount of money growing tax-deferred in your IRA,” he said. “The tax implication of this depends on your individual circumstances.”

Panambur noted the CARES act also has expanded the loan provision from eligible retirement accounts except for IRAs, which are not eligible for a loan.

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This story was originally published on Aug 25, 2020. presents certain general financial planning principles and advice, but should never be viewed as a substitute for obtaining advice from a personal professional advisor who understands your unique individual circumstances.