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Did You Withdraw Cash From Your 401(k)? How To Avoid Tax Hit

Due to the pandemic, Congress gave Americans a break. If you really needed the money, you could tap your 401(k), but to avoid a tax hit, you still need to pay the money back.

Here’s what you need to know, according to the IRS:

  • The 10% additional tax on early distributions does not apply to any coronavirus-related distribution. Typically, distributions received from an IRA or retirement plan before reaching age 59 ½ are subject to an additional 10-percent tax, unless an exception applies.
  • These COVID-reflated “hardship” distributions aren’t subject to the 10% additional tax on early distributions, including the 25% additional tax on certain SIMPLE IRA distributions.
  • Repayment to an IRA or workplace retirement plan can occur within three years.
  • The CARES Act waives required minimum distributions (RMDs) during 2020 for IRAs and retirement plans, including for beneficiaries with inherited IRAs and accounts inherited in a retirement plan. This waiver also includes RMDs if you turned age 70 ½ in 2019 and took your first RMD in 2020. You’re not required to have been affected by the coronavirus to waive your RMD for 2020.

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