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Penalty Free Retirement Plan Withdrawals—CARE ACT 2020 Tax Year ONLY
September 16, 2020   |   2020 Tax Year, Form 1040, IRS, Retirement Accounts IRA/401K, Tax Resources, Taxes

Pair of hands holding empty wallet

The other day someone affected by the COVID related business slowdown asked,  . . .”I have bills to pay, heard something on the news about the CARES Act allowing a penalty free (NOT TAX FREE)  retirement account distribution. What is the “penalty”? Do I qualify for a penalty free distribution? How to determine the taxes on the distribution? “

Normally if an employee withdraws funds from most retirement plans before reaching age 59 and ½, there is a 10% penalty in ADDITION to any tax due–UNLESS an exception applies.

An employee can take a penalty free CARES ACT qualified retirement distribution (no additional tax penalty) if:

  1. They are sick with COVID   OR
  2. Family member is sick with COVID  OR
  3. If workplace hours or pay has been reduced because of COVID or COVID quarantine OR
  4.  If can’t work because of lack of child care. . . AND
  5. Distribution is $100,000 or less and was received between January 1 and December 31, 2020.

(Self employed taxpayers can qualify for a penalty free retirement distribution too in some instances but that is outside the scope of this article).

Traditional 401k, IRAs, 457s and SIMPLE Distributions are usually fully taxable. Roth 401Ks/IRAs maybe only partially taxable. To calculate the tax on the distribution: need estimated wages, earned income (includes unemployment), Retirement distribution amount and Federal tax amount already withheld. Enter the information into the IRS tax withholding calculator at https://www.irs.gov/individuals/tax-withholding-estimator or contact your tax professional. . .

For more information see: https://www.irs.gov/newsroom/coronavirus-related-relief-for-retirement-plans-and-iras-questions-and-answers

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