ROCHESTER, N.Y. (WROC) — There are tax breaks for people who tapped into their retirement accounts during the pandemic.
CPA Matt Bryant discussed the tax changes for retirement distributions during the pandemic Thursday during News 8 at Sunrise.
How are withdrawals on retirement accounts usually taxed?
· Taxed as ordinary income, added to your wages on W-2s and other income items
· Plus a 10% additional tax on early withdrawals from a retirement plan for people under 59-1/2
Any tax savings for distributions during the pandemic?
· The 10% additional tax is waived if withdrawals were taken in 2020 due to COVID-19 hardships
What qualifies as a COVID-19 hardship?
· A positive COVID-19 test approved by the CDC
· Adverse financial impact from quarantine, furlough, lay off, reduced hours, reduced pay, inability to work due to lack of child care, reduced self-employment income, job offer rescinded or start date delayed
Are there limits on the waiver of additional taxes?
· Yes, distributions over $100,000 in 2020 are subject to the 10% additional tax on early withdrawal
Are there any other tax benefits for retirement withdrawals during the pandemic?
· Taxpayers may elect to include their withdrawal over three years from 2020 through 2022
· 1/3 of the withdrawal would be included with income each year
Can you repay an early withdrawal to minimize income taxes?
· Yes, if you had an early withdrawal in 2020 due to a COVID-19 hardship, you can recontribute amounts withdrawn through the end of 2022 and there will be no income taxes on the withdrawals that were contributed
What about required minimum distributions from retirement plans during the pandemic?
· If you were 70-1/2 before the end of 2019 and were subject to a required minimum distribution from your retirement plan in 2020, you could elect not to take that distribution
What if a taxpayer has questions about retirement income and their income tax returns?
· A trusted certified public accountant can be a great resource for income tax questions and returns