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Penalty free distributions from Retirement Plans due to COVID-19

This blog discusses how individuals impacted by Covid 19 can take advantage of changes to retirement plan distributions rules.



In general, unless an exception applies, distribution from a qualified retirement plan before the age of 59½ is added to taxable income in the year of withdrawal as well as subject to a 10% early withdrawal penalty. However, if your income is impacted by Covid 19, you may be eligible to withdraw penalty free distribution from your retirement plans.


A “coronavirus-related distribution” is any distribution from a qualified retirement plan (including 401k, Traditional IRA and Roth IRA), made on or after January 1, 2020, and before December 31, 2020, by an individual:


1) Who was diagnosed with the COVID-19, or

2) Whose spouse or dependent is diagnosed with such virus, or

3) Who experiences adverse financial consequences as a result of one of the following:

•Being quarantined due to such virus or disease,

•Being furloughed or laid off, or having work hours reduced due to such virus or disease,

•Being unable to work due to lack of child care due to such virus or disease,

•Closing or reducing hours of a business owned or operated by the individual due to such virus or dis-ease, or

•Other factors as determined by guidance issued by the IRS.


The administrator of the plan may rely on the individual’s certification that he or she satisfies the conditions described in clauses (1), (2), or (3) above in determining whether any distribution is a coronavirus-related distribution.


Amount: Individuals can withdraw upto $100,000 between Jan 1 to Dec 31 2020 under these provisions.


Income inclusion: The CARES Act allows a taxpayer to include income attributable to a coronavirus related distribution ratably over three years, beginning with the year of distribution. For eg, if you withdraw $30000 in 2020, you have option of including $10000 as income in each of year of 2020, 2021 and 2022.


10% early withdrawal penalty: If you satisfy above conditions, you wont be required to pay this penalty.


Recontribution: The CARES Act allows a taxpayer to recontribute a coronavirus-related distribution to an eligible retirement plan within three years. In such case, you do not have to include distribution as your income. Please note that recontribution is optional.


Please feel free to contact us should you have any questions.

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