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Penalty-free Withdrawals from Retirement Accounts

The CARES Act waives the 10 percent penalty tax applied to early distributions from IRAs and defined contribution plans (such as 401(k) plans) in the case of coronavirus-related distributions made between January 1, 2020, and December 31, 2020. If you re-contribute the distribution within three years, it will be treated as a tax-free rollover contribution and will not count against your contribution limits. If the distributions are not re-contributed, the income tax on the distribution can be paid over three years.

Eligibility

You are eligible if you or a family member is infected with the coronavirus or is economically harmed by the public health crisis. You do not need to provide proof other than self-certification that you meet these conditions.

Distributions from the following plans are eligible penalty-free withdrawals:

• A qualified employee plan under section 401(a), such as a section 401(k) plan
• A qualified employee annuity plan under section 403(a)
• A tax-sheltered annuity plan under section 403(b) for employees of public schools or tax-exempt organizations, or
• An individual retirement account under section 408(a) or an individual retirement annuity under section 408(b) (IRAs).

Limits on Distributions

Distributions that can be treated as coronavirus-related are limited to $100,000 per individual.

Impact on Income Tax for 2020

In addition to waiving the 10 percent penalty, the CARES Act allows you to choose to include the coronavirus-related distribution in your gross income over a period of three years, instead of including the full distribution in your 2020 taxable income. 

For more information about how to access federal resources, visit schatz.senate.gov.