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Early Distribution from IRA. Not sure about penalty


Dave T

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4 hours ago, Pacun said:

$60 for W7, but DC government had shut down none-essential businesses. So the client went to MD where tax preparers were essential and I lost that income.

You might have a case that you lost some self-employment income, which is a factor stated in sect. 2202, but can you consider $60 an adverse financial consequence?

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Yes, that was my weekly groceries allowance. I ate very little that week because I didn't know where the free food was.

I have seen people with Covid-19 that were asymptomatic, their employer paid them the two weeks they were out and yet they qualify for $100K penalty free withdrawal of 401k.

I have seen people that have not been affected by he illness per se but they cannot get to their work place because of the restrictions.

I have also seen that people are making even extra money during the pandemic and they drive from free food distribution centers to another collecting all the free items while others don't have much to eat.  Who said this is not crazy?

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So you wouldn't allow me to not pay penalty based on the fact that I lost $60 and took out $100K from my 401k?  That's the way I interpret the law (I am not required to pay penalty).

How about my wife? She collected unemployment because she was affected by the covd-19 virus and she couldn't go to work because her restaurant closed for 3 months. She used to make $300 a week and unemployment gave her $1000 every week.  

Was she affected by covid? was I affected by covid? Who are we (tax preparers) to decide how she felt in quarantine without walking to work, without interacting with her co-workers? Just wearing a mask is a burden on people so don't come and tell me that Covid-19 didn't affect most people. Prior to Covid, I have only seen 2 people wearing masks in my whole life while they robbed.  I know some of you love the fact that you are now wearing a mask but I guarantee you that you will NOT be wearing it in a couple of years.

Again, everything is subjective and I guess that's why there is a wording on the instructions that the tax payer auto certifies that he was affected by covid.

 

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2 hours ago, Pacun said:

Was she affected by covid? was I affected by covid?

Yes for your wife if she was laid off or had reduced hours due to pandemic.  Yes you experienced adverse financial consequences as a result of closing or reducing hours of a business that you own or operate due to covid; and there is no set dollar amount in sec 2202 or Notice 2020-50 that I can see.

But in the case of the original post there is a narrow gate to pass through since he was laid of before the pandemic hit, and does not meet any of the criteria of sec 2202 or Notice 2020-50 in his inability to find a new job.

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10 hours ago, DANRVAN said:

Yes for your wife if she was laid off or had reduced hours due to pandemic.  Yes you experienced adverse financial consequences as a result of closing or reducing hours of a business that you own or operate due to covid; and there is no set dollar amount in sec 2202 or Notice 2020-50 that I can see.

So, when my tax business was shut down by the government for about 2 months my hours were not reduced? The $60 is a "tangible" example and I using. Me going "pay check" to "pay check" and for 2 months my office was shut down by the government was not a nice event.  To me that sounds terrible since my budget for March was not met and April is the best month for me and my disposable income was 0. 

As you can see, we can make points and go back and forth and I appreciate each response. I will not reply to this subject anymore because this just a personal experience from my part but again, this forum is for us to see different angles and each opinion is appreciated. 

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Pacun, you raise some interesting points.  My income did not change during COVID, although it might have spread out a little because of the extended deadline.  But I did have to spend more for cleaning, cleaning supplies and disposable masks for customer use - so my expenses were up slightly.  I did not withdraw any money from my retirement, and am above the age of penalty anyway, but I wonder if that would qualify me for paying the tax over three years if I had? 

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Just a bit of follow up to my original post on the early IRA withdrawal.

Clients readily admit that distribution was not Covid related and had based their decision on assurance from financial advisor that there would be no penalty. There is a bit of irony in that if they had taken funds from the wife's IRA it wouldn't have been an issue as she is over 59 1/2.

To their credit, they have kept emails from advisor of this assurance and to the advisor's credit they have said that if indeed this is not Covid related they will reimburse my clients for the $5K penalty incurred.

This topic has stirred some very interesting and thought provoking discussion.

 

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2 hours ago, Gail in Virginia said:

Pacun, you raise some interesting points.  My income did not change during COVID, although it might have spread out a little because of the extended deadline.  But I did have to spend more for cleaning, cleaning supplies and disposable masks for customer use - so my expenses were up slightly.  I did not withdraw any money from my retirement, and am above the age of penalty anyway, but I wonder if that would qualify me for paying the tax over three years if I had? 

I said that I was not going to reply to this post but your points are well taken.

Also, every other year I get a credit car with 18 months interest free. I got a credit card in November 2018 and the last month for me to pay the balance was April 2020.  I ordered ATX 2018 software and I also ATX 2019 software (along with other office supplies) using that credit card with the hopes that I was going to pay off the balance in April 2020, but in March my business was shut down by the government so my income was near 0 in April 2020.  I was affected on that angle too. So even though my income was spread out, I was affected.  Notice that each case has its own merit so just by looking to the fact that I made the same amount of money (as you stated it) doesn't mean that I didn't get affected.  Again, just spending $5 dollars in masks it is a burden caused by Covid-19 and the regulations (as correctly stated by DANRVAN) don't specify a dollar amount and that' why someone would argue that spending $5 dollars in mask grants withdrawing $100K from 401k and paying 0 penalty. 

What we are getting out of this thread is that we need to listen to our clients and see if they meeting the loosely criteria of the regulations. 

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3 hours ago, Gail in Virginia said:

I wonder if that would qualify me for paying the tax over three years if I had? 

For a self-employed person there are two routes available by sec 2202 and Notice 2020-50 as reflected by the instructions to 8915-E.

First if your business was closed or your hours were reduced due to covid.  That does not appear to be your case.

Secondly if your self employment income was reduced.

Your gross income was not reduced, but did the extra cleaning cost reduce your SE income and caused you to experience adverse financial consequences?

 

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