 Internal Revenue Service IRS tax news, important info for people considering making early withdrawals from retirement funds. Honestly, what you really need to know about withdrawals from retirement funds is that we, the IRS, will most likely take a large part of your money. And you need to be okay with that, as you, in your old age, gummed down, well-sogified top ramen or whatever. We would also like to inform you that if you invite a thief over for dinner by the end of the night, you'll most likely not have any more silverware. The difference is that a good deadbolt often keeps out a thief, but we, the IRS, are much more patient and resourceful. You can keep the door to your savings closed and deadbolted for a good long while, however, we will just patiently wait until you're old and feeble, and then at the ripe old age of 70 and a half or so, we'll pry open the door to your retirement fund with the crowbar of required minimum distributions. And at that point, your money is as good as gone, like that silverware. After you had dinner with that thief who took your silverware, remember? Anyway, it's first of a joke. I asked the IRS agent what would happen if I don't pay my taxes. This is it. The moment we should have trained for. They said they were working on a process to made me. Sabotage. My God, man, what does it mean? And I was like, made me? Did you mean make me? We have to tighten security, sir. Find out who's behind it. No, no, no. The word sabotage. What does it mean? No, said the IRS made you. It's a Canadian term. Stands for medical assistance in dying. And together, we'll show the multiverse that Trigon is not to be trifled with. For taxpayers that don't pay, we would like to hire a maid assistant to help you die. Oh, I'm sorry, Bender. I hate to be the bearer of bad news. Also, good news, everyone. We think it would really increase compliance. Careful, you must be when sensing the future, Anakin. The fear of loss is a path to the dark side. And I was like, hold it, so wait a second here. You want to hire a medical professional to assist me in dying for not paying my taxes? Before I knew that you were going to say that. Who's the more foolish, the fool or the fool of all of us? And they're like, no, no. That would cost way too much. That would be a waste of time. We plan on hiring an actual maid, you know, paying her just over what she would get, making beds at a motel six. Once you start down the dark path, forever will dominate your destiny. But she would be administering medication to assist you in dying. That's where the medical part comes in the acronym of maid. Good night, blood to suck her. No! COVID tax tip 2022-162, October 24, 2022. No matter how much people plan unexpected events occur, often those events result in unplanned expenses. To cover these costs, sometimes people withdraw funds from their retirement savings early. Let's take a quick step back and think about the retirement savings idea in general and the tools often used for it. So within our working years, it's going to be a good idea for us to put money away so that we have the money in our retirement years, because in our retirement years, we most likely don't have the same kind of capabilities to be able to earn revenue as we do in our prime working years. So that's the general idea. In general as well, people are not good at long-term planning decisions. It seems that we're kind of designed to deal with the upcoming decisions in the current timeframe and therefore we often neglect the long-term planning strategies. Some of the concepts with the retirement plans from a government standpoint would be to give current benefits for long-term savings to try to incentivize people to save for the long-term would be one of the ideas or concepts of some of the retirement plans like a 401K plan, a 403B plan, an IRA type of plan. So in those cases then, if you put money away into the retirement plan, then you get a tax benefit today. You don't have to report the income that you would have had to report as income today. You get to defer it until the point in time that you take it out of the retirement plan. So that can be a great incentive and it could be a huge kind of benefit that say employers can give to employees, but obviously it's only a benefit to people that have the cash flow that can actually take the money that they would have now and put it into the retirement plan to get that benefit. Now the problem with that, of course, is now we're incentivizing people to put more than they maybe otherwise would or possibly even need under the umbrella of retirement plans, a 401K, a 403B, an IRA in order to get current day tax benefits. And then if there's an emergency or something comes up, they don't have the cash flow in order to deal with it because it's under the umbrella of the retirement plan. And part of the trade-off of the retirement plan is if you put money under the retirement plan, then it's going to be somewhat locked up. You can't get into it as easy as you could if you put it in some other area. And that's one other thing I just want to point out. Notice that if there was no such thing as a 401K or an IRA, you'd still want to stay for retirement and you would still use the basic strategies or tools for investment that you would when using a 401K, that being usually mutual funds, for example, stocks and bonds and so on. You would just wouldn't have it under the umbrella of a retirement plan. The only reason you put money under the umbrella of a retirement plan is because you get tax benefits for doing it. If you didn't get the tax benefits, there would be no point of having a 401K plan. It's not like a separate special investment tool. It's just something that's under an umbrella that's giving you basically tax benefits for it. But the downside of that is you're restricting your money. You can't take it out as easily. So when you do take it out, the idea would be that you're taking it out at retirement. Even at that point, you're going to be taxed on it because you got to defer the tax until retirement. That was kind of the deal. But if you need the money early, then not only are you going to pay tax on it, but you might be penalized for it unless there's some circumstance that you can justify taking it out early because that's the whole concept of getting the tax benefit. You get the tax benefit so that you save for retirement. If you pull the money out, you're not saving for retirement because you pulled the money out. All right, that's the general idea with this. So while this may seem like an easy way to get cash quick, early withdrawals can come with heavy penalties and costly tax consequences. They sure can't. So here's some important info for people to consider before they dip into their hard-earned retirement savings. Workplace retirement plans. These are the 401k plan, which are non-government kind of retirement plans, the 403b and the 457b, possibly these items where you're working at a government entity. So these plans can distribute benefits only when a certain event occur. The plan's summary description should clearly state when a distribution can occur. It will also state if the plan allows hardship distributions. So that would be distributions. You can say I'm going to put money in for retirement, but if there's some big tragedy, then I'm going to need the money early. It's my money. I should be able to activate it or get to it without being penalized would be the kind of concept to it. So early withdrawals are loaned. So hardship distributions are withdrawals for a participant's account made because of an immediate and heavy financial need, and it's limited to the amount necessary to satisfy that financial need. So if you have that kind of exception, then you want to make sure that you qualify for the exception. And you want to make sure that when you take the money out of the retirement plan, that you can try to go through the process to inform the financial institution of the circumstances so that when they issue you a 1099 telling you that you had a withdrawal, they mark it off on that as being a qualified hardship distribution because they're also going to send that to the IRS. If they mark on the 1099 that it was an early withdrawal, then the IRS is going to try to charge you penalties and interest. So you got to make sure that you get the right box checked off on the 1099. So the end of the employee includes the need of the employee's spouse or dependent. Hardship distributions are included in gross income unless they consist of designated Roth contributions. So the Roth IRA is a little bit different. You'll recall because that means that you are paying the taxes now and you get a benefit from it at the point in time you take the money out of the Roth distribution. So it's kind of a reverse concept of it. And the reason you might do that is because for whatever reason you think that your tax rates will be lower now possibly than at your retirement timeframe but you still want to save for retirement so that that's the tax incentive tool that you can use basically in that instance. So distributions before the participant turns 65 or the plan's normal retirement age, if earlier, may result in an additional income tax of 10% of the amount withdrawn. So just realize that you might qualify for a hardship distribution and then you might say, well, I'm free and clear. I'm just going to take the money out, no problem. So you're still going to have to pay the normal income tax on it typically because you got a benefit when you put the money in of not paying the taxes. It's a deferral. What you're trying to avoid is the additional 10% penalty for the early withdrawal. And so that's what you want to avoid. So the other income tax that you'll be paying you would have to pay that no matter when you took the money out because you'd have to record it as income when you take the money out no matter what. So paying hardship distributions back to the plan and pulling it over to another plan or IRA isn't permitted. Borrowers repay loans from these plans back to the retirement account. Borrowers should review the limits on loan amounts and other requirements. There's a link to that here. Taxes on this money don't occur if the loan meets the rules and repayment happens on schedule. So the thought process would be, if there's a hardship first, can I pull the money out without being penalized or something like that? If not, is there some way I possibly can take a loan against the money using the money in essence as collateral on the loan which is kind of similar to pulling the money out, right? So you still have the same, you want to make sure that you qualify for that kind of strategy if you're to use that strategy. Required minimum distribution. Taxpayers must make required minimum distributions each year beginning with the year the taxpayer turns 72, 70 and a half if the taxpayer turned 70 and a half in 2019. People calculate the RMD required minimum distribution by dividing the IRA account balance as of December 31st of the prior year by the applicable distribution period or life expectancy. Required minimum distributions are waived for 2020 due to COVID-19 relief provisions. Required minimum distributions are not required for Roth IRAs because of the different nature of the Roth IRA. So the general idea with the required minimum distributions if you think about this would be okay, why would that be? Well, they're trying to incentivize you to put money into a retirement plan by giving you a tax benefit at the point in time that you put the money in and that means it's really a deferral. And then if you wait until a period to take it out then you can take it out without having a tax, then you can take it out without a penalty but you will still be subject to taxes. But what if you don't want to take it out? You don't need it at that point in time and you're like, well, if I take it out then I'm gonna have to pay taxes on it and I already have enough money at this point in time. Why don't I just leave it in there and then possibly inherit it over to my two or something like that? Is there some way I can avoid paying taxes altogether on it? And the IRS is gonna try to avoid that by saying, well, no, we're gonna choose an age which they've been toying with 72, 70 and a half. They waived the required minimum distributions for COVID and whatever this weird stuff but they're gonna usually say the idea would be once you hit a certain age, we're gonna look at your life expectancy from that time frame forward and try to determine how long it would take for you to drain that retirement account because we wanna get paid the taxes on that money that we didn't get paid taxes on because we let you get a tax-free money because we wanted to incentivize you to put it into the retirement account. So now they're gonna make you take it out so they can charge the taxes on it. And they're gonna use actuarial tables to see how long you're expected to live and then how much the required minimum distributions will be based on how much money you have in the IRA or the 401k and so on. So it gets quite complicated. IRAs and IRA-based plans. Individuals can take distributions from their IRA, SEP IRA, or simple IRA at any time. Taxpayers do not need to show a hardship to take a distribution. They can just contact the financial institution managing the account. Early distributions occur when individuals withdraw money from an individual retirement account or retirement plan before 59 and a half. These retirement plan distributions are subject to income tax. Individuals must also pay an additional 10% early withdrawal tax unless the exemption to the early distribution tax applies. There's a link to the exceptions here. So once again you're gonna, if you pull the money out, if it was under an umbrella, now we're talking IRA rather than a 401k, 403B, but still same concept applies. If you pull it out early, you might have to pay the 10% penalty on it. Notice that even if you can wave the 10% penalty, you'll still be generally paying income taxes on the distribution because like with the 401k plan, you got a tax deferral. When you put the money in, that's the point. They put it under the umbrella of this plan even though it restricted you from taking the money out even though it's your money. So regardless of age, the account holder must file a form 1040 individual income tax return showing the amount of withdrawal and complete and attach a form 5329 additional taxes on qualified plans including IRAs and other tax-favored accounts. There's a link to that here to the tax return. These are requirements of early withdrawals and regular distributions. Coronavirus-related distributions and loans. So now we've got the coronavirus laws all got messed everything up and made everything way confusing. So the CARES Act made it easier to access savings in IRAs and workplace retirement plans for those affected by the coronavirus. There's a link to that here. So obviously they're saying, hey, look, we've got this widespread problem where people might need their money and if they need the money, they've got money but they're in the retirement plans and they're restricted because if they take the money out then they're going to have a problem. Maybe we can loosen the belt on the restrictions of the retirement plans during this time and that would be one of the ideas. So certain distributions made from January 1, 2020 through December 30, 2020 from IRAs or workplace retirement plans to qualified individuals. There's a link to that here may be treated as coronavirus-related distributions. There's a link to that here. These 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. So you can take a look at those rules if you're in that particular situation that might give some forgiveness of the 10% penalty and give you the capacity to put it back into the IRA at a later time and kind of get back in general to where you were before would be the general idea of it. So taxpayers can include coronavirus-related distributions in income over three years, one-third each year or if elected in the year of the distribution. Divorce-related distributions. Early distributions taken from a traditional IRA to satisfy a divorce requirement or court order so that I was required to take a distribution from the divorce what do you want from me IRS you're going to penalize me for anyway our subject there's a link to regular income tax requirements and the 10% additional tax unless there's a qualifying exception. So there's a link to all this stuff here there'll be a link to this in the description.