ANY RELIEF FOR 401 K DISTRIBUTION

[Lee B]

New client, 55 year old male voluntarily quit his full time mid management job in October and took a $ 75,000 distribution from his 401 k

to fund starting a new business. Based on his answers to my inquiries, he is not a qualifying person for a covid 19 distribution.

He assumed based on a news article that he could spread the $ 75k over 3 years with no penalty. He withheld some state tax,

but $ 0 federal tax. None of the 401 k money is left. Fortunately for him, his business has already turned the corner,

generating enough positive cash to support his family and promises to be fairly profitable soon.

Any ideas to lower the income tax and penalty hit on the $ 75 k distribution?

 

 

 

[Pacun]

In this case it is not the intent of the distribution that matters. What matters is if he, his spouse, his dependent or a household member was affected physically or economically by Covid-19. If he qualifies for auto certifying that he, his spouse, dependent or household member was affected by covid, he can pay tax 1/3 each year. 

If he is was 55 last year, then he doesn't have to pay penalty because he separated from service.

[Lee B]

According to him no one in his household was affected by covid other than his 2 children had to go to school online.

So if you're 55 and voluntarily quit, you're not subject to the penalty?

[Pacun]

Correct.  Separation of service is the requirement. It could be that you got fired, laid off, or simply that you quit. Make sure you have the date of birth correctly. You don't pay penalty if you become 55 in the year you take out the money. So if you are going to be 55 on December 31, 2021, you can take out the money now and qualify. 

[DANRVAN]

On 3/13/2021 at 7:25 PM, Pacun said:

If he is was 55 last year, then he doesn't have to pay penalty because he separated from service.

Bingo!