COVID-19 and Your 2020 401(k)-Withdrawals

November 16, 2020 | Sharon Epperson | CNBC

Stacy Miller, CFP® was recently featured in a CNBC article titled Few Workers Take Advantage of COVID-19 Rules for 401(k) Plan Withdrawals. In it, CNBC Senior Personal Finance Correspondent Sharon Epperson quotes Stacy on her concerns about plan participants receiving and understanding their tax obligations from the withdrawal.

This is the original text that Stacy shared:

When a client makes a 401(k)-withdrawal using the CARES Act rules, the tax penalty should be waived, but regular income tax will still be due as the withdrawal is still considered income. Tax should be withheld by the Custodian when the funds are withdrawn, however depending on several things, additional tax could be due when the employee files their annual tax return. The tax that is withheld is an estimate.

Additionally, there are qualifying rules; it is not for everyone. You have to have had COVID, or your dependent has had COVID, and/or you have experienced adverse financial consequences due to COVID. And what is the burden of proof? I do not have an answer for that.

Bottom line, there are a number of ifs, ands, buts with this, not to mention the logistics of doing it all correctly per the IRS, so my hope is that advisors have shared this with their clients who are making the withdrawals (& that they understand it), but my fear is that these employees are getting no information and are just doing it anyway without understanding it all. They could end up with a tax bill they are not expecting.

Here is the IRS guidance on it: https://www.irs.gov/newsroom/coronavirus-related-relief-for-retirement-plans-and-iras-questions-and-answers