IRS Waives 10% Penalty For Some Early Retirement Plan Distributions

In most cases, a distribution from a retirement plan prior to age 59 1/2 will subject the taxpayer to an additional 10% tax on the distribution. For instance, if you withdrew $50,000 from your IRA at age 45, you would owe an additional tax of $5,000 (along with income tax at your tax rates on the $50,000 distribution).

UPDATE: The Coronavirus Aid, Relief and Economic Security Act (CARES) exempts payments made with respect to any coronavirus-related distribution, up to a maximum of $100,000. While there would still be income taxes potentially due the 10% additional tax would not apply.

So what is a coronavirus-related distribution? CARES defines this as a distribution made in 2020 from an eligible retirement plan made to a qualified individual.

So who is a "qualified individual"? A qualified individual is one:

1. Who is diagnosed with the virus SARS-CoV-2 or with coronavirus disease 2019 (COVID-19) by a test approved by the Centers for Disease Control and Prevention;
2. Whose spouse or dependent is diagnosed with such virus or disease by such a test; or
3. Who experiences adverse financial consequences as a result of being quarantined, 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 disease, or other factors as determined by the Secretary of the Treasury.

While the requirements under numbers 1 and 2 (above) seem to be straightforward, it would also seem to me that a vast majority of Americans could use #3 (above) to support any early distribution and avoid the 10% penalty.

Repayment provisions. This part of CARES gets even better! If you receive a coronavirus-related distribution, you may (but are not required to), at any time during a 3-year period beginning when the distribution was made, repay the amount of the distribution. This would permit you to get the funds (or at least some of them) back into a tax-deferred account and eliminate taxes until retirement (or the next distribution).

Income provisions. In the past, a taxable distribution from a retirement plan must be reported in the year of the distribution. Not with CARES! When you receive the coronavirus-related distribution, your distribution will be divided by 3 and taxed in 3 separate years. You may elect out of this provision and have it all taxed in the year of distribution as well (which may be useful if you expect your income to rise considerably in the next few years).