Roth 401k Distribution – CARES Act

Submitted by Samuel Taylor on Wed, 2020-05-13 14:53

I have a client that is in need of cash due to his wife being recently layed off. He is 50 yo and has contributed to his 401k Plan primarily (85%) to the Roth portion of the Plan. He plans to retire in 2 years. Am I correct in the following thoughts…

If he takes a distribution from his Plan, the 10% Early Distribution penalty is waived.
He can spread the taxable income over three years.
The entire amount of the in-service distribution will be taxable.
If he takes the funds as a loan, he has until his retirement date to pay back the loan without it being taxable.
At the time of retirement, the portion of the loan not paid back becomes a taxable distribution and is not eligible to be spread out beyond that tax year. (The year he retires).

Thanks,

Ed



Submitted by Alan - IRA critic on Wed, 2020-05-13 18:03

  • A taxpayer does not qualify for a CRD due to wife’s layoff unless she tested positive for the virus. Only she qualifies for a CRD from her own retirement plan if she is not infected, and her plan may or may not even offer CRDs.
  • If and when he does qualify for a CRD from his plan, there is no penalty, and only the portion of the Roth 401k distribution attributed to earnings would be taxable. Such taxable income could be reported over 3 years 2020-2022.
  • For enhanced loan amounts and repayment extension, client would have to qualify using the same criteria as for a CRD. But the plan may offer ordinary loans as previously available. Not sure exactly how long client would have to payoff the loan once separated.

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