Covid-19 Relief Tax Tip: Early Distributions
The Covid-19 pandemic wreaked havoc on many industries, professions, and individual incomes in 2020.
To weather the financial storm, many people took an early distribution from their retirement account, which normally would be subject to a 10% early withdrawal penalty for those younger than 59 years and 6 months old.
However, the CARES Act of 2020 temporarily waived the 10% tax penalty for coronavirus-related distributions made from retirement accounts between January 1, 2020, and December 31, 2020.
While you will owe tax on the distribution, you also have up to three years to replace that money back into the account and recoup the taxes that you owed.
You should have received a 1099-R reporting the early distribution, so it’s important you talk to your tax professional about what is required to prove the distribution was a coronavirus-related hardship to avoid the 10% penalty and save on your tax bill.