When the Stimulus Check Isn't Enough…
With most of the country still on lockdown and the unknown of how and when we're getting back to “normal”, the savings and stimulus checks are probably dwindling fast; however, there is a provision in the Cares Act that may provide some short-term relief for certain people. This is called the Coronavirus-Related Distributions, and it refers to withdraws made from your retirement accounts (IRA, 401K, 403B, etc.).
What Changed?
Previously, you couldn't withdraw money from these accounts before age 59 1/2 without incurring a 10% penalty. There were some exceptions to this, but that was the general rule. With the Cares Act, these rules have been relaxed for 2020. So what does that mean? If you qualify, you can withdraw up to $100,000 from your retirement accounts before age 59 1/2, without incurring a 10% penalty.
Although the amount that you take out will be taxable, instead of reporting all of that on your 2020 tax return as income, you can actually spread that income out over the course of three years (2020, 2021 and 2022). You don't necessarily have to do it that way—sometimes, spreading out income over the course of several years can reduce your overall tax liability. However, if you're in a situation where you think your 2020 income is gonna be very low, it may be worth considering reporting all of it in 2020. But talk with your tax advisor about that one.
One way to avoid taxes completely is by repaying the amount you took out. You have three years from the date you receive the distribution to replenish those funds. Let's say in 2020 you decide to take out $10,000 from your IRA. You have until 2023 to put that money back into the account. And if you decide to do that in a later year, let's say 2021, then you can actually file a 2020 amended tax return and get a refund for the amount of taxes you paid on that in 2020.
Who Qualifies?
Your next question may be, "How do I qualify?" Well, here are the guidelines:
Have you been diagnosed with COVID-19?
Has a spouse or dependent been diagnosed with COVID-19?
Have you experienced adverse financial consequences, as a result of being quarantined, furloughed, being laid off or having work hours reduced because of the disease? (I think a lot of people are gonna fall into this category.)
Are you unable to work because of the lack of childcare as a result of the disease?
Do you own a business that has closed or are you operating under reduced hours because of the disease?"
As you can see, this was meant to be broad and apply to a lot of people. So if any of these apply to you, you may qualify.
Things to Consider
But I think the real question is, should you? And that really depends on your unique circumstances. A few things to ask yourself as you're thinking through this:
Have you exhausted all other resources?
Have you cut out all non-essential expenses?
Have you received your stimulus check, and is that or has that gone towards paying for essential needs?
Have you dipped into your emergency fund?
Have you considered a loan from your employer retirement plan? And what does your income look like moving forward?
These are all things to think about and to consider. So talk with your CPA or financial advisor about this and see if it's right for you. As always, stay healthy, stay hopeful, and hang in there.