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Are you eligible to take money out of your 401(k) due to COVID-19?

Are you eligible to take money out of your 401(k) due to COVID-19?

The Internal Revenue Service’s official guidance on Covid-19-related 401(k) and Individual Retirement Account loans and distributions is out, and it expands the list of who can qualify for special tax relief. Newly eligible: those who’ve had a job offer rescinded or a job start date delayed due to the coronavirus.

The CARES Act, the $2 trillion stimulus package passed in late March, opened the door to taking huge sums out of retirement accounts. The IRS issued FAQs on Covid-19-related IRA and 401(k) loans and distributions in early May.

The new IRS guidance reiterates that an individual must actually be a qualified individual to obtain favorable tax treatment. In other words, not just anyone can raid their 401(k) or IRA. You must meet the requirements to be eligible.

Under Notice 2020-50, a qualified individual is anyone who –

  • is diagnosed, or whose spouse or dependent is diagnosed, with the virus SARS-CoV-2 or the coronavirus disease 2019 (collectively, “COVID-19”) by a test approved by the Centers for Disease Control and Prevention (including a test authorized under the Federal Food, Drug, and Cosmetic Act); or
  • experiences adverse financial consequences as a result of the individual, the individual’s spouse, or a member of the individual’s household (that is, someone who shares the individual’s principal residence):
  • 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;
  • closing or reducing hours of a business that they own or operate due to COVID-19;
  • having pay or self-employment income reduced due to COVID-19; or
  • having a job offer rescinded or start date for a job delayed due to COVID-19.

Employers can choose whether to implement these rules (most are choosing to do so). If your employer doesn’t, you can still claim the tax benefits when you file your tax return. For more details, there’s the 19-page formal guidance and the IRS FAQs.

Source: forbes.com

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