Retirement Plans: 401(k)s, IRAs and More
There were a lot of changes to retirement plans in 2020—and some of those changes could impact your tax bill this year. Let’s tackle each of those major changes:
•The CARES Act allows folks under age 59 1/2 to take up to $100,000 out of their 401(k)s and IRAs up until the end of 2020 without having to pay an early withdrawal penalty. But first, taking money out of your retirement accounts before retirement is a terrible idea—penalty or not. Second, the money you take out of tax-deferred retirement accounts like a traditional 401(k) or IRA will be taxed as ordinary income, so get ready to pay taxes on any withdrawals you make. •If you own a traditional IRA, you have to take money out of your account once you reach a certain age. Those withdrawals are called required minimum distributions (RMDs). The good news is the SECURE Act pushed back the age for RMDs from traditional IRAs from 70 1/2 to 72 (if your 70th birthday was July 1, 2019 or later). On top of that, the CARES Act allows seniors to skip RMDs altogether in 2020 without penalty. That’s huge, because it could lead to significant tax savings for retirees with those accounts since the money that’s taken out of a traditional IRA counts as taxable income. •The SECURE Act also allows owners of traditional IRAs to keep putting money in their accounts past age 70 1/2 starting in 2020. Since the money you put into a traditional IRA is tax deductible, you could lower how much of your income is taxed this year. Just remember: You will have to pay taxes on that money whenever you take it out.
One last thing: If you did take some money out of a 401(k) or traditional IRA and you’re facing a huge tax bill, don’t panic! You have three years to put those funds back and get a refund on any taxes you paid on that money. And more importantly, it’ll help you get your retirement savings back on track. It’s probably a good idea to reach out to an investment professional who can walk you through the process.