Understanding Penalty-Free Distributions Under the CARES Act

The CARES Act, passed into law in response to the COVID-19 pandemic, includes several provisions that benefit retirement account owners and taxpayers. One of the most significant is the temporary waiver of the 10% early withdrawal penalty for certain retirement account distributions related to the coronavirus crisis.

What Are Coronavirus-Related Distributions?

According to Denise Appleby of Appleby Retirement Consulting, a coronavirus-related distribution is defined as one that meets the following conditions:

Made between January 1, 2020, and December 31, 2020

The recipient must fall into at least one of these three categories:

Diagnosed with COVID-19 by a test approved by the Centers for Disease Control and Prevention (CDC).

Spouse or dependent diagnosed with COVID-19.

Experienced adverse financial consequences due to:

Quarantine

Furlough or layoff

Reduction in work hours

Other factors, as determined by the IRS

Key Provisions for Retirement Account Distributions

The CARES Act offers three important relief measures for qualified individuals taking coronavirus-related distributions:

1. Waiver of the 10% Early Withdrawal Penalty

Normally, early distributions from retirement accounts before age 59½ are subject to a 10% penalty. For eligible individuals under the CARES Act, this penalty is waived.

2. Extended Rollover Period

Typically, a rollover contribution must be completed within 60 days of receiving the distribution. The CARES Act extends this period to three years, allowing more flexibility to repay the distribution into a retirement account.

3. Three-Year Income Spread

Retirement distributions are generally taxed as income in the year they are received. However, under the CARES Act, individuals can choose to spread the income tax burden evenly over three years, beginning with the year of distribution.

Distribution Limit

The maximum amount allowed for coronavirus-related distributions under the CARES Act is $100,000 per taxpayer. This limit applies across all retirement accounts combined.

Penalty-Free Early Distributions: Bob Powell, CFP and Co-founder of finStream.TV reviews penalty free early distributions from retirement accounts due to Covid-19. For more information about distributions, please click on this link: https://www.finstream.tv/glossary/required-minimum-distribution-rmd/

Final Thoughts

The CARES Act provides valuable flexibility and relief for individuals impacted by COVID-19. If you’re considering taking a retirement distribution under these provisions, it’s important to understand the qualifications and consult with a tax or financial advisor.

For more insights, listen to the full interview with Denise Appleby on The Street’s Speech Channel on SoundCloud, and explore the Retirement Daily section on TheStreet.com