December 30 is the last day to withdraw money from qualified retirement accounts for coronavirus-related emergencies without paying a penalty fee, but some account holders may want to double check the rules with their companies and plan providers — as soon as possible.
The CARES Act, passed in April, allowed individuals to take up to $100,000 in coronavirus-related distributions from eligible retirement accounts — such as 401(k) plans and individual retirement accounts — between Jan. 1, 2020 and Dec. 30, 2020, according to the Internal Revenue Service. Plan participants have until 4 p.m. EST on Dec. 30 (when the stock market closes) to request the coronavirus-related distribution, Vanguard and Fidelity Investments said.
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Typically, individuals who have not yet turned 59½ years old (or were separated from their jobs after 55 years old) must pay an additional 10% tax on distributions from these retirement accounts. The law allowed withdrawals tied to pandemic-fueled hardships to bypass that penalty. Acceptable reasons included losing a job, experiencing a reduction in wages, becoming diagnosed with the virus and having a job offer rescinded. The adverse effects could be impacting the original account owner, as well as a spouse or other household member.
Employers did not have to adopt the rule, and were permitted to choose to what extent they amended their plans to allow for coronavirus-related distributions, the IRS said. If allowed, plan providers said participants must provide all information and documentation by market close to have the CRD processed with a Dec. 30 trade date.
Some people may experience difficulties, such as if they need spousal consent to take a coronavirus-related distribution, which requires more paperwork, Fidelity said. They may not have enough time to take the withdrawal, in that case.
The distribution could be spread over three years to lower the tax consequences, or included all in the year of the distribution, the IRS said. Individuals can also repay the distribution within those three years, and would simply need to file an amended income tax return for the years they included the distribution.
The CARES Act also allowed for plan loans up to the lesser of $100,000 or the plan participant’s vested balance from qualified retirement plans, with an additional year to repay the loan, the IRS said. IRAs are ineligible for these loan provisions.