If your expenses and your cash flow have been effected by the coronavirus, your employment situation has changed, you need to watch this video to understand how you can take distributions of your 401k properly.
Welcome everyone to the Highball Advisors Railroad Retirement Whiteboard. My name is John McNamara of Highball Advisors. Today, we're going to be talking about an issue that's starting, we're seeing affecting a lot of Railroaders and even a lot of other individuals. That's the impact of the coronavirus on people's cash flow and their savings and the expenses, right? We're seeing Railroads asking people to take reductions, take additional time off. Businesses are trying to save money any way they can to stay afloat during this definitely turbulent time. The US Treasury has, and the US Congress has allowed for premature 401k distributions, right? I'm going to talk about the benefits of that and how you want to do it. Hopefully, you'll find this stuff helpful. So as you know, if you take a 401k distribution before the age of 59 and a half, there's a 10% penalty.
Now, there's a coronavirus exception, and we're going to talk about that right now. There's five benefits of the distribution of 401k. The first one is the exception for the 10% penalty, right? Before 59 and a half, if you take money out of an IRA, this also pertains to an IRA or 401k, those tax-deferred retirement accounts that we talk about, there's normally a 10% penalty. However, with the new rules, just ordinary income tax will be taken out, assuming you're under 59 and a half. Over 59 and a half, you can start withdrawing money. But, so there's no 10% penalty. That's a big thing. So When you take the money out, you still got to pay income tax at your income tax rate., Okay. Second benefit. We'll keep moving here, is the distribution of income for three years.
This is interesting. Let's say you can take up to $100,000 out of your 401k. That's the relief ceiling, the most, the amount of money you can take out, but you could spread that in the, on your income taxes over the course of three years. Let's use an easy example. Let's say you need, you're having an economic impact because of the coronavirus. You need $60,000 out of your 401k, maybe for health concerns or some other living issues because of the coronavirus. That $60,000, even though you take it out this year, 2020, you could spread that out over three years. So, on your income tax, it would be 20,000 for 2020, 20,000 for '21, 20,000 for '22. That is taking out and that spreads out your tax liability and that might also be helpful for not bumping you up to a higher tax rate.
That's benefit number two. Let's look at a benefit number three over here is ... oops, excuse me, is you don't have to repay it for up to three years. Repayment up to three years. What does that mean? Is, you're paying ordinary income tax on that, but you know what? You say, "Well, things might get better. I want put the money back in." You can put the money back in and recoup, get back those taxes that you would have paid on it. You have up to three years from, so if it comes out in 2020, you can only take the money out in 2020, but you have up till 2023, to pay the money back into your 401k or IRA. Now you say yourself, "Well, John, I paid the taxes on that, so can I recoup that?"
The answer is yes. However, you got to talk to your CPA, your tax preparer in those years, so you would have to file an amended return. Let's just say, if you paid taxes on 2021, '22, something along that line, and let's say 2023, you pay it back, you have to go file an amended return for those years to get back that income tax. All right? That's another benefit right there, the chance to pay that all back, which is great. Let's go to the fourth benefit, no withholding from your 401k. When you take, normally when you take a distribution from your 401k, let's just, I'll make a nice round number. Let's say you take $100,000, distribution from your 401k, there'll be a withholding. The company will take a withholding of 20% and send it to the US Treasury.
You would receive $80,000 and Treasury, would get 20,000. However, there is no withholding. Here you would receive the full $100,000. That's another benefit there, is the no withholding. You're getting all the funds, because at the end of the day, the government wants the funds into the economy to help you out. Finally, allow access to 401k plans is the fifth benefit. Normally, you cannot get money out of your 401k before 59 and a half, unless there's some sort of hardship type thing. This exception here, is you can get out for coronavirus-related. Now this is important also. It's great. You have all these benefits. You can get the money out, but remember it has to be coronavirus-related, so if you say, "Oh yeah, I wanted to take out 50,000. I want to buy a boat."
That's not this, okay? This is for coronavirus hardships. That's the only way you can get it out. Make sure that you understand when you take that money out, that it is coronavirus-related. The Treasury right now is still writing the rules on that a little bit right now. It's still loose, but I can tell you right now, it's got to be coronavirus-related. It could be an economic hardship. It could be health expenses. Just, it has to be linked to coronavirus. That's basically it. If you do need the money out of the 401k and you are affected by the coronavirus, this is a strategy here for you to help you get you over the hump here.
I hope you all found this very useful. Please subscribe to my YouTube channel. As you can see down in the lower right hand of your corner, there's a Subscribe button. Please click on that. Subscribe, like to see those numbers keep going up. It's been great. Meantime, if you have any issues, reach out to me. I'm around to help you guys out. I appreciate that. Let's see if I can help you. As always, please stay safe, stay on track and take care. So long everybody. Bye.
Disclaimer: This article is provided for general information and illustration purposes only. Nothing contained in the material constitutes tax advice, a recommendation for purchase or sale of any security, or investment advisory services. Highball Advisors encourages you to consult a financial planner, accountant, and/or legal counsel for advice specific to your situation. Reproduction of this material is prohibited without written permission from Highball Advisors, and all rights are reserved.from Highball Advisors, and all rights are reserved.