CARES ACT IRA WITHDRAWAL in 2020 FOR HELP IN 2021 (Lay off)
My husband and I are 51 & 52. Husband is primary earner and carries insurance (I work part-time with no benefits). Husband was laid off 11/30/20. We will need to use IRA money to live on very shortly (we depleted our emergency savings during a prior layoff in 2019 and it isn’t yet restored).
Due to the CARES Act would it be better to withdraw a chunk of IRA money in 2020 so we don’t have penalty tax for withdrawal?
We need the money to pay health insurance premiums and some of our mortgage in 2021.
There is no way of knowing how long this unemployment will last so we don’t know if it would be a qualified withdrawal in 2021 (if over 2% of AGI for medical expenses I think?). Otherwise, we face a 10% tax penalty if 2021 dollars are withdrawn, correct?
And if he does gain employment, because of the CARES act, will we be able to return any money we don’t use within the next 3 years?
Permalink Submitted by Alan - IRA critic on Thu, 2020-12-10 20:38
If the layoff is the result of Covid, you both qualify for a corona virus related distribution (CRD) up to 100,000 per spouse, limited by the IRA balance for each spouse from which to take the distribution. The deadline for a CRD is 12/30/2020, therefore you need to request the amount needed before Christmas to make sure it is distributed in time. You can decline withholding or increase it above the automatic 10% if you need to. A CRD is penalty free, and can be repaid up to 3 years from the date of distribution. You would probably elect to spread the distribution reporting over 3 tax years (all penalty free), and therefore if you repay some of it later in the 3 year period in an amount greater than the 1/3 taxable for the repayment year, you would probably want to file an amended return for a refund of taxes already paid. With a CRD you can therefore forget about the other penalty waivers since the CRD is more flexible and beneficial. The 2020 CRD must be reported on Form 8915 E with your 2020 return.