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Now easier to qualify for a penalty-free retirement distribution

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The CARES Act provided taxpayers with the option to take penalty-free coronavirus-related withdrawals of retirement funds of up to $100,000 in the aggregate between January 1, 2020, and December 31, 2020.

To qualify for the penalty relief, taxpayers must have a COVID-related reason for taking the money out of their retirement plan. The CARES Act provided a list of qualifying factors, and stated that other factors would be determined by the Secretary of the Treasury. IRS Notice 2020-50 provides us with those additional factors provided by the Secretary of the Treasury.

A qualified individual for purposes of coronavirus-related distributions:

  • To a person diagnosed with SARS-CoV-2 or COVID-19 by a test approved by the Centers for Disease Control and Prevention or whose spouse or dependent was so diagnosed;
  • To a person experiencing adverse financial consequences as a result of:
    • Being quarantined, furloughed, or laid off;
    • Having work hours reduced due to the virus;
    • Being unable to work due to a lack of child care;
    • The closing or reducing of hours of a business owned or operated by the individual due to such virus;
    • The individual having a reduction in pay (or self-employment income) due to COVID-19, or having a job offer rescinded or start date for a job delayed due to COVID-19;
    • The individual’s spouse or a member of the individual’s household (as defined below) being quarantined, being furloughed or laid off, or having work hours reduced due to COVID-19, being unable to work due to lack of childcare due to COVID-19, having a reduction in pay (or self-employment income) due to COVID-19, or having a job offer rescinded or start date for a job delayed due to COVID-19; or
    • Closing or reducing hours of a business owned or operated by the individual’s spouse or a member of the individual’s household due to COVID-19.

For purposes of applying these additional factors, a member of the individual’s household is someone who shares the individual’s principal residence.

Note: California does not conform to all of these provisions.Generally CA conforms to retirement-related items such as exclusion of the early withdrawal penalty, but they do NOT conform to changes made with regard to increasing allowable loan amounts from a qualified retirement account from $50k to $100k.

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