Skip to main content

Weighing Options: Penalty Free Distributions from Retirement Plans

The Coronavirus Aid, Relief, and Economic Security (CARES) Act has temporarily waived the 10% fee for early distributions – from Individual Retirement Accounts and employer-based plans, such as 401 (k) plans. Individuals may take coronavirus-related distributions of up to $100,000 by December 31, 2020.

The Coronavirus-related distributions apply to individuals who have been diagnosed with COVID-19 or have a spouse or dependent who has. Additionally, individuals qualify if they’ve experienced financial hardships due to being quarantined, furloughed, laid off, had a job offer rescinded or had a delayed start date and work hours reduced. It also applies to those unable to work due to lack of child care, have a business and had to close or reduce hours of operation, or any other factor provided in guidance from the Internal Revenue Service and U.S. Treasury.

The CARES act allows individuals to pay back the amount they withdraw to their qualified retirement plan over a three-year period. An individual who does this may avoid having a tax liability for the distribution. However, the individual will need to file an amended return to get a refund of taxes paid on the distribution. Additionally, the distribution amount may be reported as income over a three-year period, so it won’t necessarily be taxed on the full amount for 2020 tax year.

Coronavirus-related distributions are an option for many individuals and families who have experienced financial hardship due to COVID-19. However, it is important to consider the loss of selling investments when the market price is low. Perhaps it may be best to utilize the emergency funds, if available, before taking money from your retirement plan and losing out on growth in the future. Therefore, it is important to consider the specific situation, financial priorities, resources, and contact the retirement plan sponsor to determine options.

For more information visit Coronavirus-related relief for retirement plans and IRA questions and answers and FINRA CARES Act 2020: Retirement Fund Access and Student Loan Relief

Employers and eligible retirement plans can visit IRS Notice 20-50 for information regarding certification of eligible individuals and recontributing a coronavirus-related distribution.