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I lost my job because of COVID-19 cutbacks — can I tap into my IRA?

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Q: I’m 49 and was laid off due to COVID cutbacks. A former co-worker says I can tap my IRA tax-free this year. How do I do that?

— Tim

A.: Tim, there is no provision for tax-free IRA distributions. What your ex-coworker may be referring to is a Covid-related Distribution. The CARES Act, aka the stimulus package, passed earlier in the year waives the 10% penalty normally incurred for IRA withdrawals prior to 59½ if you were adversely affected by COVID. Only the 10% penalty is waived not the income taxes. Distributions can be made at any time in 2020 up to a cumulative total of $100,000. (Similar rules apply to tapping a 401(k) or other qualified retirement plan but plans are not required to allow COVID-related transactions.)

Read our COVID-19 news coverage

To be considered COVID-related, you, your spouse, or dependent must be diagnosed with the virus SARS-CoV-2 or with coronavirus disease 2019 (COVID-19) by a test approved by the Centers for Disease Control and Prevention; or you must experience adverse financial consequences.

80% of older Americans can’t afford to retire – COVID-19 isn’t helping

Adverse consequences are being furloughed or laid off, having work hours reduced, being unable to work due to lack of child care, or closing or reducing hours of a business that you own or operate; due to SARS-CoV-2 or COVID-19

When you take the distribution you can either report all the income on your 2020 tax return or split the income evenly over 2020, 2021, and 2022. You cannot split in any other proportion. It is important to note that you are splitting the income and not the taxes due. If you take $45,000 of distributions, you are either putting $45,000 of distributions on your 2020 tax return or $15,000 on the 2020, 2021, and 2022 returns respectively.

Read: There are six types of retirees. Which one are you?

It is possible that if you go back to work, your income could be higher in 2021 or 2022, creating a higher tax rate than if you paid it all up front. There is a bit of a safety valve in such a scenario.

You can repay any portion of a distribution at any time up to three years from the day after you take a distribution. Normally, there is a once-per-year 60-day rollover rule for IRA distributions that limits your ability to return money to an IRA and eliminate tax on the distribution. This once a year rule does not apply to COVID-related distributions.

So, if you paid for the $45,000 distribution on your 2020 return, you could get your taxes refunded by putting the $45,000 back in the IRA after you returned to work. You would file an amended 2020 return reducing your reported distributions for 2020 by any portion of the $45,000 paid back within three years.

If you opt to spread the income over three years and pay a portion of what you took out at some later date, its more complicated. The payback causes the income to be reduced proportionately on all three years returns.

Read: How to cope with seasonal depression in an already-challenging year

For example, say you take out $45,000 in 2020 and spread it over three years ($15k on each year’s tax return). Right before your three years are up, you payback $33,000. This makes the net distribution $12,000 ($45,000 – $33,000), or $4,000 a year. You would amend your 2020, 2021 and 2022 tax returns to show IRA distributions $4,000 each year. You would be refunded the taxes attributable to the $33,000 ($11,000 2020, 2021, and 2022 respectively.)

If you have a question for Dan, please email him with “MarketWatch Q&A” on the subject line.

Dan Moisand is a financial planner at Moisand Fitzgerald Tamayo in Orlando, Melbourne, and Tampa Florida. His comments are for informational purposes only and are not a substitute for personalized advice. Consult your adviser about what is best for you. Some questions are edited for brevity.



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‘I could live on my Social Security and still save money’: This 66-year-old left Chicago for ‘calming’ Costa Rica — where he now plans to live indefinitely

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Editor’s note: This article was first published in September 2019.

A school break changed 66-year-old Martin Farber’s life forever.

In 2007, his daughter — who at the time was attending Illinois State University — decided she wanted to spend a college holiday volunteering in Costa Rica and staying with a local family, he explains. She came home raving about the experience, so, in 2008, Farber — who at the time was living in Evanston, Ill., just outside Chicago, and selling cars — took his first trip there.

“It was a big surprise to me — bumpy roads, dogs barking in the streets,” he says. “I wasn’t enamored at first.”

But as his daughter began traveling there more and eventually moved there for a year, he took additional trips to Costa Rica. It quickly grew on him — in particular, the people. “The Costa Rican people are warm, open and friendly. I felt less invisible in a strange country in a strange town where I didn’t speak the language than I did in Evanston.”

And the more time he spent there, the more it impacted him: “On one of my trips there, I thought: My daughter’s life makes more sense than mine,” he says. “There was nothing wrong with my life, but I felt that my life was out of context with who I’d become. … I would have bills and make money to pay them, but that had ceased to be satisfying,” he recalls. “I knew I needed to change my life — there was no more joy in what I was doing.”

What’s more, when he’d return from his Costa Rica trips, people noticed. “I would come back, and my friends and therapist would say: You seem better after you go,” he says with a laugh.

A view from the hot springs near Martin Farber’s home in Costa Rica.


Martin Farber

So in 2014, he packed up and moved to Orosi — a picturesque, lush small town with waterfalls and hot springs a little over an hour’s drive from San Jose — promising himself he’d stay for two years. It’s been five, and he now plans to stay in Costa Rica indefinitely. (Though Farber notes that, to him, “it’s not a retirement; it’s a chance to lead a new and different life.”)

Here’s what his life is like, from costs to health care to residency to everyday life:

The cost: While many expats spend way more living in Costa Rica, Farber says: “I could live on my Social Security and still save money.” He says “a person can live on $1,200 per month, two people on $2,000.” The key, he says, is to live more like he does and as the Costa Ricans do — in a modest home, eating local food and purchasing local goods.

Indeed, Farber himself spends just $300 a month for rent (he rents a home from a friend who moved recently and gave him a good deal), roughly $225 a month on groceries and just $50 a month total on water and electricity (the temperate climate in Orosi means you rarely need heat or air conditioning). The veteran Volkswagen
VOW,
+0.96%

 
VLKAF,
+0.98%

salesman saves money by not owning a car (those over 65 ride municipal buses for free), which can be a significant expense in Costa Rica; for his cellphone, “I pay as I go … roughly $10 may last me a couple weeks or more,” he says, adding that “many people handle there their cellphones this way. You can get them recharged anywhere.”

His major expense is travel: He goes back to the U.S. to visit his mother in Florida several times a year and lately has spent part of the summer in Chicago helping out a friend with a dealership there. He also spends a good amount of money on health care. He says that while flights can be had for as little as $350 roundtrip during offseasons, the cost can be much higher the rest of the year.

In the saddle.


Martin Farber

Health care: Farber, who has permanent resident status in Costa Rica, says he pays about $90 per month to participate in the country’s health-care system — adding that the health care he’s received has been very good. (A 2018 study of health-care quality and access in more than 190 nations ranked Costa Rica No. 62.)

When he developed a detached retina, though, he paid for the procedure out of pocket so that he didn’t have to wait for the required surgery, he says — adding that the entire procedure cost him about $5,000. “I would have had to have waited four days,” he says, if he had not paid to expedite matters. “That might have been fine, but it might not.” And he adds that the quality of care depends on where you get it in the country.

Lifestyle: Though Farber says that he “moved here with no goals and no agenda,” he’s found plenty to do. “I take Spanish lessons two days a week for two hours a day. It’s been great. I never thought I would acquire a usable language in my 60s,” he says. He also rides his bike all around the area, does some writing and belongs to a community group that undertakes projects to improve the area.

And he often simply takes in nature, which he says has been an essential part of why he feels calmer and more relaxed in Costa Rica than in the U.S. “I live at 3,000 feet but in a valley surrounded by coffee fields and lime trees and water. At night, if I open the windows, I can hear the river rushing by,” he says. “It is very calming … hundreds of trees everywhere … you know the Earth is alive.”

The historic Iglesia de San José de Orosi.


iStock

Cons: “I don’t want to overglorify. It’s not without its problems,” Farber says of Costa Rica. “There are social problems and downsides.” He notes that crime and petty theft can be a problem (“I am cautious,” he says of his approach) and seem to have increased since he moved there, and adds that he misses out on some cultural things because of where he lives. And, he says with a laugh, “I can’t order Thai food at 9 at night.” But, he adds: “These are trade-offs — in the afternoon, I get to walk in the coffee fields and see flocks of parrots.”

Residency: To qualify for Costa Rica’s pensionado visa, expats must prove that they have a pension of at least $1,000 coming in each month. (Here are the details of that program.) Once you have lived in Costa Rica for three years, you can apply for permanent residency. Farber used a lawyer to help him figure out the ins and outs of residency options; his entire path to permanent residency took about a year, he says.

The bottom line: “After five years I am still amazed and surprised that I made the decision to lead a life I never thought I would,” he says. And while he may not stay in Orosi forever — “the town doesn’t have an ambulance, [and] I don’t know what it will be like to be 80 there,” he says — he does plan to stay in Costa Rica in no small part because of the people and sense of community. “I have the feeling that life is good here,” he says. “It’s hard sometimes, but we are all in it together.”



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