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The CARES Act and IRS Notice 2020-50 is allowing for coronavirus-related eligible withdrawals by certain IRA holders and participants within plans. The provision generally permits withdrawals in 2020 of up to $100,000 for individuals who have been diagnosed with the virus SARS-CoV-2 or coronavirus disease 2019 (COVID-19), individuals whose spouse or dependent is diagnosed with such virus or disease, or individuals who experience adverse financial consequences as a result of:

  • Individual, individual’s spouse, or a member of the individual’s household being quarantined, furloughed or laid off, or having work hours reduced due to COVID-19;
  • Individual, individual’s spouse, or a member of the individual’s household being unable to work due to lack of child care due to COVID-19;
  • A business owned or operated by the individual, individual’s spouse, or a member of the individual’s household closed or reduced hours due to COVID-19; or
  • Individual, individual’s spouse, or a member of the individual’s household having a reduction in pay (or self-employment income) due to COVID-19 or having a job offer rescinded or start date for a job delayed due to COVID-19; or
  • Other factors as determined by the Secretary of the Treasury (or the Secretary’s delegate).

For purposes of applying these additional factors, a member of the individual's household is someone who shares the individual's principal residence.

These distributions qualify for an exception to the IRS early distribution penalty (if under 59 ½ years of age), and allow for taxation to be spread ratably over a three-year period. These withdrawals can also be re-contributed within the three-year period following the withdrawal, and are not subject to normal qualified plan mandatory 20% withholding.

Which retirement accounts are right for you?

The best retirement plans include a variety of options such as a 401(k) and annuities. Here are some types of investments to learn more about.

As interesting as your job may be, you might not want to work at it forever. And if you save money now, it will help you meet your financial needs when you retire.

Social Security may provide you with some funds, but it was never designed to be a person's sole source of retirement money. If you want to travel instead of watching travel shows on television, you'll probably want to supplement Social Security with your own savings.

To help you accumulate money for the things you will want to do in retirement, the government offers some tax breaks when you save money now within certain types of tax-qualified retirement accounts. This article will give you an overview of the different plans so that you know where to do further research.

Individual Retirement Accounts

People saving for retirement on their own or looking to supplement an employer's plan can do so through an Individual Retirement Account (IRA). Let’s take a look at Traditional IRAs and Roth IRAs.

The amount of your annual contribution to a Traditional IRA that can be deducted from your federal income taxes is dependent on two factors:

  • Whether or not you or your spouse participates in an employer-sponsored retirement plan; and,
  • The amount of your modified adjusted gross income as determined on your federal income tax return.

The following scenarios should help you determine whether or not your contributions are deductible.

  • If you (and your spouse) are not covered by an employer sponsored retirement plan, your contributions to a Traditional IRA are fully federally income tax deductible, regardless of the amount of your modified adjusted gross income.
  • If you (or your spouse) are covered by an employer sponsored retirement plan, your modified adjusted gross income level will determine how much of your contribution is federally income tax deductible.

Allowed deduction, depending on filing status and modified adjusted gross income

The amount you may deduct, whether a full deduction or partial, depends on your tax filing status. Follow this link to find the amounts for Traditional IRAs; they are located in the Modified Adjusted Gross Income section. The following link provides Roth IRA Eligibility Requirement information that is under the Eligibility Requirements for Roth IRA Contribution section.

If you are married and you and your spouse file a joint income tax return, and you are not an active participant in an employer-sponsored retirement plan, but your spouse is, deductibility of your Traditional IRA contributions is dependent upon your combined modified adjusted gross income as described below.

Allowed deduction, depending on combined modified adjusted gross income

If you aren’t covered by a retirement plan at work but your spouse is, this information provides the full and partial amounts:

  • Traditional IRA – select the Modified Adjusted Gross Income section and look for Combined Modified Adjusted Gross Income.
  • Roth IRA – select the Annual Contribution Limits

Traditional IRA plans

With a Traditional IRA plan, the money you contribute may be deductible from your federal income taxes now. There's no tax due on the interest, dividends and capital gains earned while you hold the account, either. You will generally have to pay income taxes on withdrawals, but many people find themselves in a lower tax bracket when they are retired than when they are working. Before you turn 59½, your withdrawals will generally be subject to a 10% penalty tax unless they meet certain exceptions for such things as qualified medical, educational and first-time home buyer expenses.

Roth IRA plans

Roth IRA plans are named for their champion, the late Senator William Roth of Delaware. Contributions to these accounts are not federally income tax deductible. However, the funds you contribute, and the earnings on them, are generally not taxed when a withdrawal is made, as long as you've owned the account for at least five years and reached the age of 59½.

Younger workers can withdraw the amount they put in at any time, but if they want to withdraw earnings for anything other than the standard exceptions, they will pay a federal income tax on any income or capital gains earned, as well as a 10% penalty tax.

Employer retirement plans

Employers can offer retirement plans to help attract and retain good employees. Retirement plans can help employers save money at tax time. Some types of plans allow them to offer additional tax breaks to employees as well.

In the past, many employers offered a pension, which provided a steady income after retirement. Fewer employers do that these days, instead favoring SIMPLE IRAs, SEP IRAs or 401(k) plans (offered to employees of for-profit businesses). In a SEP IRA, the employer makes all contributions to the plan. Under the other plans, the employer may make a non-elective contribution for all employees, or it may offer to match a percentage of the funds that employees contribute.

The information in this article was obtained from various sources not associated with State Farm® (including State Farm Mutual Automobile Insurance Company and its subsidiaries and affiliates). While we believe it to be reliable and accurate, we do not warrant the accuracy or reliability of the information. State Farm is not responsible for, and does not endorse or approve, either implicitly or explicitly, the content of any third party sites that might be hyperlinked from this page. The information is not intended to replace manuals, instructions or information provided by a manufacturer or the advice of a qualified professional, or to affect coverage under any applicable insurance policy. These suggestions are not a complete list of every loss control measure. State Farm makes no guarantees of results from use of this information.

Neither State Farm nor its agents provide tax or legal advice.




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