Have you withdrawn a portion of your retirement funds early because of the pandemic and are now stuck with paying the 10% early withdrawal penalty? Many people have found themselves in financial hardship and have needed to take out some of their retirement funds before the mandated retirement age. Normally, early distributions made prior to turning 59.5 years of age have been subject to penalties and income tax. However, in light of the pandemic, the IRS has recently released some guidance regarding early withdrawals.
In the recent publishing of IRS Notice 2020-50, the IRS addressed coronavirus-related distributions within the Coronavirus Aid, Relief, and Economic Security (CARES) Act.
Here is the basic rundown of the benefits:
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To qualify for assistance, the IRS requires an ‘acceptable self-certification’:
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Learn how we turned Martha’s $22,000 tax liability into a tax refund:
Martha came to us after she withdrew $68,643 from her pension plan. Since she distributed her funds before the mandated retirement age, she accrued $6,864 in penalties. On top of the penalties, there are also federal and state taxes, adding $16,000 to her overall bill. Before Martha came to us, she owed $22,864 in taxes and penalties.
Her husband's furlough from his job last August qualified the couple for relief. After consulting Alejandro, our EA and tax advisor, she was able to abate the $6,864 penalty entirely and split her withdrawal into three separate, taxable distributions. For the years 2020, 2021, and 2022, she will recognize $22,881 from her retirement plan. This way, Martha can meet her family's needs while paying only a fraction of what she owed in taxes. In the end, reducing her taxable income resulted in Martha receiving a tax refund for the 2020 tax year. Thanks to Alejandro, Martha went from being tens of thousands of dollars in debt to the IRS to have the IRS owe her money back during a time of need.
If Martha's story sounds familiar to you, don't let this opportunity pass by. Schedule an appointment at Mendoza&Co today to see how we can work for your tax needs.