Author Topic: Cares Act Retirement withdrawal- How is Income bracket determined  (Read 251 times)

Lmoot

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I am sadly not well-versed in income brackets and am trying to understand how un-earned income affects which tax bracket you are placed in, specifically in regards to the new Cares Act penalty-free retirement withdrawal rule.

Everything I've read says that any retirement withdrawal will be taxed at your income bracket....but what are they using to calculate your bracket? 2019 income? 2020 income minus the withdrawal, 2020 income including the withdrawal?

For example, in my case I am not going to earn as much this year because of being out of work in one job (quit...long story, bad timing on career change), and furloughed from a part time job. I have not decided if I am going to file for unemployment for the furloughed job, so I am assuming my 2020 income as it stands, will be what I've earned through March (when I stopped earning income), plus what I may earn when/if I start working again later this year.

I didn't earn much to begin with, but income was close to the minimum income level of the 22% bracket in 2019, and because of the reduced income, will fit solidly in the 12% bracket this year.

So....

If I were to take $40,000 total out of my retirement account. Does that mean I will be bumped up to the 22% income bracket? Or would they tax it at what my income bracket is without the distribution (12%?).

terran

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Re: Cares Act Retirement withdrawal- How is Income bracket determined
« Reply #1 on: April 14, 2020, 12:59:26 PM »
As long as you can show you were impacted by COVID-19, the withdrawal will be added to your income just like an any retirement account withdrawal with two differences:

1) You won't be subject to the 10% penalty even if you're under 59.5 years old
2) You can choose to spread the income over 3 years instead of realizing it all in the year of withdrawal. This is a bad idea if you expect to be back to high paying work in subsequent years, and a good idea if not. Some states are already disallowing this treatment for state tax purposes.

Here are the 2020 tax brackets: https://taxfoundation.org/2020-tax-brackets/. Remember to subtract the standard deduction.

MDM

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Re: Cares Act Retirement withdrawal- How is Income bracket determined
« Reply #2 on: April 14, 2020, 01:24:45 PM »
Does that mean I will be bumped up to the 22% income bracket?
Note that only the income within the 22% bracket is taxed at 22%.  In other words, if you go $100 into the 22% bracket you pay only $22 more than if your taxable income just reached the start of the 22% bracket.