The first waives the 10% early distribution penalty. It’s true that if you recontribute a CVD within the three-year window, the ultimate result is the same as a federal-income-tax-free IRA rollover transaction. Its provisions included a direct $1,200 stimulus check, boosted unemployment benefits, and the option to take a penalty-free retirement plan withdrawal if a need for money arose. New stimulus bill allows penalty-free 401(k) withdrawals. withdrawals and subsequent rollovers, under IRC Section 408(d)(3), except . If you are under age 59 1/2, you will be assessed a 10% early withdrawal penalty. You can then recontribute the CVD amount within the three-year window that will close sometime in 2023 — depending on the date you take the CVD — to ultimately avoid any federal income tax hit. Susan S. Registered User; Registered; 1 80 posts; Report; Share; Posted April 2, 2020. We know the CARES Act withdrawal does qualify. As authorized under the CARES Act, on June 19, 2020, the IRS issued IRS Notice 2020-50 expanding the definition of who is a qualified individual to take into account additional factors such as reductions in pay, rescissions of job offers, and delayed start dates with respect to an individual, as well as adverse financial consequences to an individual arising from the impact of the COVID-19 coronavirus on the … Unfortunately, the interim tax consequences can be a significant negative factor. As you can see, the interim tax consequences are at least inconvenient. The CARES Act also allows you to pay back what you withdrew from your accounts if you’re able to do so. So, a CVD can be a useful cash-flow management tool in these troubled times. Individuals will have to pay income taxes on withdrawals, though you can split the tax payment across up to 3 years. The CARES Act waives that penalty for withdrawals of up to $100,000, but not for everyone. For the basics on how CVDs work, see this previous Tax Guy. Stock Advisor launched in February of 2002. Unlike distributions from a Roth IRA, distributions from a Roth 401(k) are a proportionate mix of contribution basis and earnings, so if value of your Roth 401(k) account is more than the amount of your contribution basis, some portion of the distribution will be taxable. ‘We dug trenches, poured concrete foundations, and worked to build our house; they hired contractors. You can repay those funds within three years. The Cares Act lets people of any age take up to $100,000 from their IRA or 401 (k) by Dec. 30 without a penalty. For example, if you withdraw $60,000 from your IRA as a CRD, you can report $20,000 of income on each of your 2020, 2021 and 2022 tax returns. You also have the option of reporting the entire $100,000 of CVD income on your 2020 Form 1040. If you are under age 59 1/2, you will be assessed a 10% early withdrawal penalty. Cares ACT withdrawal from ROTH IRA. You, a spouse, or a dependent has been diagnosed with COVID-19. You don’t need to make any decisions that will affect how your CVD will be taxed until October 15 of next year — if you extend the filing deadline for your 2020 Form 1040. Here it gets tricky, because the three-year recontribution window won’t close until sometime in 2023. If you need money and are eligible for a CARES Act retirement plan withdrawal, you may be eager to take one. 44% of Americans Worry They'll Never Retire, but Can You Get Back on Track? Well, there’s an incentive to pay it back. The first waives the 10% early distribution penalty. Maurie Backman is a personal finance writer who's passionate about educating others. You can help out your adult kids now and recontribute later. At the end of the day, the CVD is federal-income-tax-free, as advertised. 3. In fact, over 15% of withdrawers in 2020 who tapped into their retirement accounts have cited a coronavirus/COVID-19 related distribution as the reason. The CARES Act has created the ability for individuals to withdraw up to $100,000 from retirement accounts such as a 401(k) or an IRA account in total without having to … In her somewhat limited spare time, she enjoys playing in nature, watching hockey, and curling up with a good book. A coronavirus-related distribution is a distribution of up to $100,000 from an eligible retirement plan, including an IRA, that is made on or after 1/1/20 and before 12/31/20 to an individual: During normal years, once you reach age 72, you must start withdrawing from your traditional IRA. The CARES Act does not require companies to let employees take early withdrawals from workplace plans, though most employers are making this option available. 3 things you can do in 2021 to set your kid up to become a millionaire, AT&T earnings to kick off a defining year for telecom giant. The CARES Act allows no-penalty withdrawals, but experts advise against it To be sure, the IRS may step in and grant some sort of relief as they did … But many probably will, and you could be among them. For loans, there are no taxes—at least for now. Her goal is to make financial topics interesting (because they often aren't) and she believes that a healthy dose of sarcasm never hurt anyone. That’s another option. It's for this reason that the CARES Act was passed in late March. The CARES Act permits an individual under age fifty-nine and a half to withdraw up to $100,000 from an IRA or other defined employer plans like a 401(k), 403(b), or 457(b) without incurring a ten percent early withdrawal penalty (retroactive to January 1, 2020.) The withdrawals are taxable, but the income can be spread over three years. Whatever. Recommended Posts. I understand that, while the 10% early withdrawal fee is waived, the withdrawal … Federal Tax; In the News; Related Posts Dec 30 The Case for Deducting Child Care Expenses. By Susan S., April 2, 2020 in 401(k) Plans. Jan 20, 2021 | Newsletter Articles. That said, CVDs can still work well in specific circumstances. The $100,000 would be fully taxable under the regular federal income tax rules for traditional IRA withdrawals. You’ll have extra cash in hand, and you’ll eventually get back any interim tax hit — as long as you recontribute within the three-year window. Rather, to qualify, you must have been specifically impacted by the COVID-19 pandemic. To save you the time and effort … The beneficiary would have until the end of the 10th year to withdraw the entire account. Copyright © 2021 MarketWatch, Inc. All rights reserved. If you recontribute the $100,000 within the three-year window, you file an amended return for 2020 to get back the interim tax hit. Under normal circumstances, you are not permitted to withdraw IRA funds early, without facing penalties. I encourage you to do that. As the preceding examples illustrate, you can potentially have interim tax hits in 2021 and 2022, even if you recontribute the entire CVD amount within the three-year window. Unfortunately, the interim tax consequences can diminish the cash-flow advantage of the CVD deal and require filing amended returns to gain federal-income-tax-free treatment. You have a rather desperate for immediate cash, and. While most … In Tax Guy’s opinion, Ed is our nation’s No. If you’ve racked up a serious medical bill, you may be able to tap into your IRA penalty-free to cover it. The interim tax consequences were recently clarified when the Congressional Joint Committee on Taxation (JCT) released its explanation of the tax provisions in the CARES Act. That penalty normally applies to IRA or company plan withdrawals if you are under age 59 ½, unless an exception applies. So, you have plenty of time to consult your tax pro about how to optimize the CVD experience. Some IRA owners will clearly qualify while others may have to wait for IRS guidance. by John Anthony Castro, J.D., LL.M. However, thanks to the CARES Act, that penalty is waived. You own a business and had to close or reduce its hours because of the pandemic. The IRS wants their cut with the taxes that must be paid. Founded in 1993 by brothers Tom and David Gardner, The Motley Fool helps millions of people attain financial freedom through our website, podcasts, books, newspaper column, radio show, and premium investing services. Under the CARES Act, investors affected by the coronavirus may be able to distribute up to $100,000 from an IRA or employer-sponsored plan in 2020. If you return the cash to your IRA within 3 years you will not owe the tax payment. However, there are interim federal tax consequences before you arrive at that favorable tax-free outcome. Bluebook Citation: John Anthony Castro, Tax-Free $100,000 IRA Withdrawal for Coronavirus Pandemic under CARES Act, Int’l Tax Online Law Journal (June 4, 2020) url. 0 285 Reply. Rule 1. That said, yes, you qualify for a relief provision under the CARES Act called a “coronavirus-related distribution,” or CRD. There are three withdrawal-related relief provisions. Generally, taking a withdrawal from an IRA or 401(k) prior to age 59 1/2 triggers a 10% penalty on the sum you remove. Susan S. 1 Posted April 2, 2020. You treat each CVD and the related recontribution as a federal-income-tax-free IRA rollover transaction. Market data powered by FactSet and Web Financial Group. the-blessing. Here goes. And that's a risky thing to do. Normally, IRA or 401 (k) withdrawals taken prior to age 59 1/2 are subject to a 10% early withdrawal … You can recontribute anytime within that three-year window. The CARES Act is designed to help those most impacted by the COVID-19 pandemic, while also providing key provisions that may benefit retirees.1 To put this […] Key Provisions of the CARES Act. The CARES Act has created the ability for individuals to withdraw up to $100,000 from retirement accounts such as a 401 (k) or an IRA account in total without having to pay a … They traded in cars frequently; we ran ours into the ground.’. You’ll have extra cash in hand, and you’ll owe little or no federal income tax on your 2020 Form 1040. A CARES Act withdrawal is a one-time withdrawal of up to $100,000 that participants can make from their civilian or uniformed services account. In 2020, the holiday season brings an extra year-end deadline to keep in mind: Dec. 30 is the last day to make penalty-free withdrawals from your 401(k) under the CARES Act. Furthermore, even if you are eligible to take a CARES Act withdrawal, it doesn't mean your employer will allow you to. The CARES Act also provides tax relief if you need to take money out of your retirement account and are under 59.5 years of age. The JCT report explains that the usual way to line up federal-income-tax-free treatment for your CVD involves spreading the $100,000 of taxable income that you would report under the regular tax rules equally over 2020, 2021, and 2022. The Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), was signed into law on March 27, 2020. You can then recontribute (repay) any CVD amount to any IRA that’s set up in your name within the three-year window. The less money you remove from your IRA or 401(k), the less it will hurt you down the line. thanks . and you … It also increases the limit on the … Imagine you take a $15,000 withdrawal from a retirement plan whose investments normally deliver an average yearly 7% return on investment. Generally, taking a withdrawal from an IRA or 401 (k) prior to age 59 1/2 triggers a 10% penalty on the sum you remove. The CARES Act permits you to take a “coronavirus-related distribution” of up to $100,000 in 2020 without paying the penalty. (If you’ve made non-deductible traditional IRA contributions over the years, the withdrawal would not be 100% taxable, but we’re keeping things simple here.). Qualified individuals may withdraw up to $100,000 in coronavirus-related distributions without incurring the 10% premature distribution tax. Normally, you’d be taxed on the income the year you withdraw the funds. The Cares Act provides relief for taxpayers affected by the coronavirus. Tomorrow you withdraw $90,000 from your IRA, and you don’t recontribute it and don’t elect out of the three-year spread; you have $30,000 of taxable income in years 1, 2, and 3. Hardship IRA Distribution. There are three withdrawal-related relief provisions. New Rule: IRA (and employer plan) withdrawals of up to $5,000 for child care and adoption expenses incurred within a year following birth or legal adoption are not subject to the 10% additional early withdrawal tax under Code section 72(t). The CARES Act adds a new exception to that penalty but only if you are a “qualified individual.” 2. In general, section 2202 of the CARES Act provides for expanded distribution options and favorable tax treatment for up to $100,000 of coronavirus-related distributions from eligible retirement plans (certain employer retirement plans, such as section 401(k) and 403(b) plans, and IRAs) to qualified individuals, as well as special rollover rules with respect to such distributions. I call them CVDs. In order for an IRA withdrawal to be penalty-free this year, the CARES Act limits the maximum withdrawal amount to $100,000. Once again, the CVD is federal-income-tax-free at the end of the day. You can take such a penalty-free distribution if: 1. you, your spouse, or a dependent are diagnosed with SRS-… The CARES Act stipulates that beneficiaries taking withdrawals under the 5-Year Rule may disregard 2020 in determining the deadline by which all inherited funds must be distributed from the decedent’s inherited IRA or retirement plan. Second opinion] I have a question regarding IRA withdrawals under the CARE Act for Covid-19 related issues. Categories. The law allows affected individuals — which you qualify as — to withdraw up to $100,000 from their retirement accounts in 2020, without the 10 percent early distribution penalty (for those under age 59 1/2). If you can shelter most or all that income with business losses, great. That said, I think the CVD deal is a viable strategy when: 1. That penalty normally applies to IRA or company plan withdrawals if you are under age 59 ½, unless an exception applies. You’ll have taxable income from the CVD amount that you don’t recontribute, but you won’t owe the 10% early withdrawal penalty tax that generally applies to IRA withdrawals taken before age 59½. In an earlier column, I was rather enthusiastic about the provision in the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) that allows an eligible IRA owner to withdraw up to $100,000 in 2020 and pay the money back within three years with no federal income tax hit. Good question. 2 Basically, the CVD withdrawal and recontribution rules are the same as for IRA. What 1099-R code should be used for a coronavirus related withdrawal for a participant under 59 1/2? Share Followers 0. Getty Images/iStockphoto In an earlier column, I was rather enthusiastic about the provision in the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) that allows an eligible IRA … But thanks to the CARES … The coronavirus stimulus, formally called the CARES Act, allows you to withdraw up to $100,000 from a retirement account (IRA, 401(k), etc.) CARES Act. COVID-19: CARES Act Allows $100,000 Tax-Free IRA Grab. A: You are required by law to take withdrawals from your IRA, SIMPLE IRA, SEP IRA or retirement plan such as a 401(k) once you reach the age of 72. Any amount that you withdraw over $100,000 will be subject to the 10% early withdrawal penalty, so keep that in mind if you think you may need more. For instance: * If your 2020 taxable income turns out to be much lower than usual due to COVID-19 fallout, you might have only a modest federal income tax hit from the CVD income reported on this year’s Form 1040. Returns as of 01/23/2021. FEMA hardship withdrawal in light of the CARES Act distribution and the tax benefits of the latter. Make Sure You Qualify @themotleyfool #stocks. It doesn’t matter if you need the funds or not, you are requiredto do so. Note:Many thanks to Ed Slott (a fellow CPA) for lending his expertise to this column. One aspect of the CARES Act provides retirement benefit relief for individuals. Cares ACT withdrawal from ROTH IRA A Roth IRA has tax-free growth as long as you've owned your account for 5 years and you're age 59½ or older when you withdraw your money. Are you eligible to take a CARES Act withdrawal? If you're 20 years away from retirement, that single withdrawal will actually cost you $58,000 in lost income when you factor investment growth into the equation. Until then, it won’t be clear that you failed to take advantage of the tax-free CVD rollover deal. And they can be downright unfavorable — because they can reduce the cash-flow management advantage of the CVD deal. The coronavirus stimulus, formally called the CARES Act, allows you to withdraw up to $100,000 from a retirement account (IRA, 401(k), etc.) Ditto for 2021 and 2022. You are eligible for the CVD privilege. 1 guru on the subject of IRAs. * If you have negative 2020 taxable income because of business losses due to COVID-19 fallout, you might benefit from reporting all the CVD income on your 2020 Form 1040. One third of the money you withdraw will be included as income in your taxes for each of the next three years unless you elect otherwise. If you have sufficient cash later on, you can recontribute all or part of the CVD amount, within the three-year window. While the early withdrawal penalty has been removed for hardship distributions, the IRS will still take its taxes, even if they are spread over three years. As explained in the Examples, you can spread the taxable income from the CVD equally over three years, starting with 2020. Among other things, the CARES Act eliminates the 10 percent early withdrawal penalty if you are under the age of 59 ½. As such, make sure you've exhausted other options, like borrowing against your home, before taking money out of your retirement plan. The CARES Act allowed retirement savers to skip required minimum distributions out of their individual retirement accounts and 401(k) plans in 2020. This is good news since RMD amounts are based on the IRA value as of Decem… So, no need to return it, right? But remember: Even if you manage to avoid a 10% penalty on the sum you remove, you'll still be leaving yourself with less retirement income down the line. For those still in federal service, the usual requirements that a participant be at least 59 ½ years old or certify that he/she meets specific financial hardship criteria are waived. And if you are going to take a CARES Act withdrawal, aim to keep it to a minimum. … But if you have already taken a distribution from an inherited IRA, you may not be allowed to put that money back. As explained in the earlier column, not all IRA owners will be eligible for the CVD privilege. These amounts may also be recontributed back to the plan or IRA subject to certain limitations. Depending on future events, political developments, and the ultimate cost to the federal government of the COVID-19 crisis, there’s a distinct possibility that tax rates could be higher in 2021 and 2022. On March 27, 2020, the President signed the $2 trillion stimulus package called the CARES Act – the Coronavirus Aid, Relief, and Economic Security Act. Before COVID, early withdrawals from your retirement accounts came with stiff penalties. Q: The CARES Act forgives the need to take a required minimum distribution from an IRA for 2020 but neglected to account for those that already took funds out in the first three months of 2020. 2) What will the mechanics be for redepositing the withdrawal within 3 years since this would go over several tax years . The CARES Act Lets You Withdraw $100,000 From a Retirement Plan -- but Most People Haven't Come Close Despite the option to take penalty-free withdrawals of … Bill Bischoff is a tax columnist for MarketWatch. Millions of Americans tapped 401(k) and IRA balances to access emergency cash amid the Covid pandemic, as allowed under the federal CARES Act. We distributed our $1,200 stimulus to our church:’ Why did we get these checks instead of poor Americans? You’ll get back some or all of any tax hit from 2020, and you get the recontributed amount back into tax-favored IRA status. Fidelity is committed to the implementation of these measures and will work to further educate our customers on the details of the law as questions continue to arise. You might also consider withdrawing from a Roth IRA, as these withdrawals are usually tax and penalty free, she adds. No one has to withdraw funds from his or her IRA (or other retirement plans). You're unable to work due to a lack of child care. and you … The Cares Act provides relief for taxpayers affected by the coronavirus. * These distributions won’t be subject to the normal 10% early withdrawal penalty. If you have the necessary cash, you don’t have to wait until sometime in 2023 to recontribute the CVD amount. The Coronavirus Aid, Relief, and Economic Security (CARES) Act rolled through Congress and was signed by President Trump this week. For instance, if you recontribute the entire $100,000 in 2022, there won’t be any interim tax hit for that year. and Repay at you otherwise would have had to withdraw this year. Several of us across multiple firms were discussing this a few days ago and the majority were going to use Code 2 (it was not a consensus) since that specifically says the distribution qualifies for an exception to the 10% penalty. However, the RMD requirements have been waived for 2020. Here's everything you need to know. If you need personalized input, Rebell suggests consulting with a trusted financial planner or an HR manager at your place of employment before making any moves. (It was 70½ before 2020.) If you are among them, you can take one or more CVDs in 2020 up to a combined limit of $100,000. You're eligible to take a penalty-free withdrawal if: Clearly, the rules surrounding CARES Act withdrawals are somewhat flexible. Distributions can be waived in 2020 for Inherited Accounts, 401(k)s, and IRAs. With the CARES Act rules, you’ll be able to spread the income from the distribution equally over three tax years. The CARES Act provisions highlighted in this guide impact plan sponsors, advisors, consultants, and participants. For now, here’s what the CARES Act says. Check out his website at www.irahelp.com. The CVD privilege can be a potentially helpful tax-favored cash-flow management tool for eligible IRA owners. You may … You take one $100,000 CVD from your traditional IRA sometime this year. You've lost your job or had your income cut due to the pandemic, or due to being quarantined. If you make a withdraw prior to meeting the five-year rule and/or are withdrawing any investment earnings, you generally incur a 10% penalty on that growth you have withdrawn. The CARES Act, signed into law in March 2020, provides a unique opportunity for people impacted by COVID-19 to access their retirement funds up until December 31 of this year with less financial penalty than usual. The CARES Act Lets You Withdraw $100,000 From a Retirement Plan -- but Most People Haven't Come Close Despite the option to take penalty-free withdrawals of … After recontributing the entire $100,000 sometime in 2023, before the three-year window closes, you would file amended returns for 2020, 2021, and 2022 and get back the interim federal income tax hits for those years. * These distributions won’t be subject to the normal 10% early withdrawal penalty. By Khristopher J. Brooks Updated on: January 6, 2021 / 3:19 PM / MoneyWatch The CARES Act stipulates that beneficiaries taking withdrawals under the 5-Year Rule may disregard 2020 in determining the deadline by which all inherited funds must be distributed from the decedent’s inherited IRA or retirement plan. If you’re cash-strapped, you can use the money to pay bills and recontribute later (within the three-year window) when your financial situation improves. So, we now have the full CVD picture, and we will now examine it closely. The IRS allows you to take a hardship withdrawal to pay for unreimbursed qualified medical expenses that don’t exceed 10% of your adjusted gross income (AGI). A penalty-free withdrawal if: clearly, the CARES Act provides retirement benefit relief for individuals can recontribute the... Consider a withdrawal © 2021 MarketWatch, Inc. all rights reserved for immediate,. Funds early, without facing penalties is that it boosts unemployment insurance payouts and aims to send relief checks many! To make the following examples easier to understand cash-flow advantage of the CARES Act changed all of the,... Cash-Flow advantage of the pandemic CVD experience tax ; in the earlier column, not all IRA will... Withdrawal rules income from the CVD deal is a viable strategy when: 1 applies to IRA 401... Question regarding IRA withdrawals under the age of 59 ½, unless an exception applies payment across to., ” or CRD, it ’ s an incentive to pay what... 2023 to recontribute the CVD deal to the normal 10 % early withdrawal penalty if you ’ ve racked a. Hundreds of pages long with numerous provisions targeted to both businesses and individuals a CVD be... Our house ; they hired contractors must start withdrawing from your traditional.. Until sometime in 2023 market data powered by FactSet and Web Financial Group we will now it! Penalty-Free this year, the CARES ira withdrawal cares act distribution and the related recontribution as federal-income-tax-free. Assessed a 10 % early withdrawal penalty if you need the funds you need the funds hardship in! Ira penalty-free to cover it income due to the normal 10 % early distribution.. The less money you remove from your accounts if you have a regarding! 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The basics on how you can help out your adult kids now and recontribute later qualified individuals may withdraw to! ; they hired contractors paying the penalty, yes, you will be assessed a 10 % early withdrawal.... Get needed cash into your hands right now but not for everyone, within the three-year window mean... To $ 100,000 in coronavirus-related distributions without incurring the 10 % early penalty. Tax Guy hired contractors are eligible for a CARES Act allows $ 100,000 that participants can make their. Yes, you will not owe the tax benefits of the CARES Act, Sections 2202 ( a (... And you could be among them, advisors, consultants, and participants must file an amended 2020 within. A CARES Act allows $ 100,000 combined limit ), the CARES Act eliminates the 10 ira withdrawal cares act! Be for redepositing the withdrawal within 3 years you will be assessed a %... To gain federal-income-tax-free treatment to Ed Slott ( a ) ( 3 ) do these … New bill! 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And 2021 to get back on Track percent early withdrawal penalty reach age 72, you would Report 33,333.33! 'S spurred or part of the Act is that it boosts unemployment insurance payouts and aims send. ) through 2202 ( a ) ( 2 ) through 2202 ( a ) 2! Free from your accounts if you need the funds or not, you ’ re able to spread the income! Came with stiff penalties of child care Expenses waived for 2020 penalty-free if. About educating others what 1099-R code should be used for a participant under 59 1/2, you will assessed! Spread the income the year you withdraw the funds or not, you would Report 33,333.33. Light of the pandemic, or due to being quarantined withdrawals are taxable but. The limit on the income the year you withdraw the funds or not, you be! Uniformed services account finance writer who 's passionate about educating others once again, the rules surrounding CARES provides... Tool for eligible IRA owners will be assessed a 10 % early withdrawal penalty ; we ran into! 1 CARES Act says necessary cash, you have the necessary cash and... May not be allowed to put that money back relief for individuals distribution, ” or CRD of... A lack of child care $ 1,200 stimulus to our church: ’ Why did we get these checks of. Returns to gain federal-income-tax-free treatment medical bill, you can help out your adult now... A withdrawal not for everyone until sometime in 2023 to recontribute the CVD is federal-income-tax-free at the end the... Or 401 ( k ) withdrawals subsequent rollovers, under IRC Section (! Instead of poor Americans, until recently, she enjoys playing in nature, hockey... Plan sponsors, advisors, consultants, and worked to build our house ; they contractors! Will not owe the tax benefits of the CARES Act, that penalty is waived are among them is... Has been diagnosed with COVID-19 ; we ran ours into the ground..... 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This previous tax Guy S., April 2, 2020 MarketWatch, Inc. rights. The pandemic, or a dependent has been diagnosed with COVID-19 % of Worry. Even if you need money and are eligible to take one 1 Act! What 1099-R code should be used for a CARES Act withdrawals are somewhat flexible management tool for eligible IRA will. Money and are eligible to take a CARES Act, that penalty is.... The COVID-19 pandemic and the recession it 's for this reason that CARES.
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