COVID-19 Early Distribution Relief

So 2020 was quite a challenging year in many regards, part of which may have been getting your bills paid on time or to buy groceries. So what many people may have done is look to their retirement accounts to pull money.

Typically, I would never suggest someone make an early distribution from their retirement, but last year is one of those, “there's always an exception to the rule” times. Normally there are penalties on early distributed money and in a normal year there are several exclusions or exceptions to the 10% penalty. A couple of the common ones are:

  1. Separation from service

  2. Substantially equal periodic payments

  3. Disability

  4. Unemployment

A few specific to IRAs are:

  1. Health insurance

  2. Higher education

  3. First time home buyers

Note: there can be many qualifications for these exceptions.

New COVID-19 relief legislation provided additional special considerations to waive the 10% penalty specifically related to the pandemic. The eligible plans include 401(k), 403(b), 457(b) or IRAs where funds were distributed to a qualified taxpayer during the 2020 calendar year and to be no greater than a total of $100,000 combined distributions.

A qualified taxpayer would be someone who has:

  1. Been diagnosed or who's spouse or dependent was diagnosed with COVID-19.

  2. Experienced severe financial consequence as someone in the taxpayers household being quarantined , furloughed, laid off or having had reduced work hours

  3. Been unable to work due to lack of childcare

  4. Had to close or reduce business hours from a business that you own

  5. Had a job offer rescinded or start day delayed

All of these related specifically to COVID-19.

The income not only avoids penalty, but you are also given the opportunity to spread the income over three years. So if you took a $12,000 distribution you would pay tax on 4,000 in 2020, 4,000 in 2021 and 4,000 in 2022. You should receive a 1099R which is the normal reporting document for distributions from my retirement account. You would then report it on form 8915-E which is qualified 2020 disaster retirement plan distributions and repayments.

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