If you take money out of a qualified retirement plan before age 59 1/2, you not only pay income tax on the distribution, but generally there is a 10% penalty as well. There are several exceptions to the penalty and the CARES Act adds a new one, allowing a taxpayer to take a “coronavirus-related distribution” of up to $100,000 in the year 2020 free from penalty.
A “coronavirus-related distribution” is a distribution made during 2020 to any of the following:
- An individual who is diagnosed with COVID-19 by a test approved by the CDC.
- An individual whose spouse or dependent is so diagnosed.
- An individual who experiences adverse financial consequences as a result of being quarantined, furloughed or laid off or having work hours reduced, or being unable to work due to lack of child care.
While the distribution escapes the 10% penalty, it doesn’t escape the income tax. The Act, however, allows the taxpayer to spread the income over a 3-year period beginning with 2020. The taxpayer also has the choice to avoid any income recognition by repaying the distribution to the retirement plan within three years of receiving it.
This applies to such distributions made from both eligible employer plans as well as IRAs.
In addition, the amount an individual may borrow from his or her retirement plan is increased from $50,000 to $100,000 for the 180-day period beginning after the enactment of the Act.
For those required to withdraw a “required minimum distribution” from their retirement plan in 2020, the CARES Act temporarily waives the requirement for this year only.