What are the Early Retirement Distribution Rules During Coronavirus?

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If you’ve lost income and need to withdraw money from your retirement account during coronavirus, here’s what you need to know.

Normal Rules

These rules apply for early retirement account distributions at all times. This is only a summary of the main ideas, so be sure to talk to your tax advisor or research the details before making any moves.

Traditional IRA

  • Withdrawals before you turn 59.5 are subject to a 10% penalty in addition to ordinary income tax rates.
  • Certain exceptions to the penalty (but not taxes) for education, buying a home, and large medical expenses.

Money in your SEP or SIMPLE IRA is treated the same as a Traditional IRA.

Roth IRA

  • Withdraw contributions at any time without tax or penalty. You need to track how much you’ve contributed to your Roth IRA over your lifetime (your 1099-R won’t show this).
  • If you’ve withdrawn all of your contributions, you can withdraw earnings before you turn 59.5 with a 10% penalty and ordinary income tax rates.
  • Certain exceptions to the penalty (but not taxes) for education, buying a home, and large medical expenses.
  • Money you’ve converted from a Traditional IRA/401(k) counts as earnings for the first five years after conversion. After five years, you can withdraw it the same as Roth IRA contributions.

IRA 60-Day Rollover

For short-term needs or if you find out you don’t need the money, you can return it to your IRA within 60 days of withdrawing it as if you never took it out. This is intended to let you move money between IRAs rather than as a short-term loan, so there are some rules. You can only do it one time (one transaction) within any 12 months (not per calendar year).

401(k)

  • Withdrawals always taxed at ordinary income tax rates.
  • 10% penalty on withdrawals before age 59.5.
  • 20% mandatory tax withholding on early withdrawals.
  • Hardship exceptions to the penalty possible but depend on BOTH IRS regulations and your plan rules.
  • Some plans offer loans, but the penalties apply if you can’t pay it back, and you may have to pay the full loan back immediately if you leave your job.
  • If you still have a 401(k) from a previous job, you may be able to roll it over into an IRA to have it treated under the IRA rules.

Roth 401(k)

  • No penalty or tax for withdrawal of contributions.
  • Earnings subject to ordinary income taxes plus 10% penalty for withdrawals before age 59.5.
  • Can’t withdraw contributions only like Roth IRAs — must prorate. E.g., if your account balance is 80% money you contributed and 20% earnings, and you withdraw $1,000, $800 counts as contributions and $200 counts as earnings.
  • Hardship exceptions to the penalty possible but depend on BOTH IRS regulations and your plan rules.
  • Some plans offer loans, but the penalties apply if you can’t pay it back, and you may have to pay the full loan back immediately if you leave your job.
  • If you still have a 401(k) from a previous job, you may be able to roll it over into an IRA to have it treated under the IRA rules.

Special Retirement Account Withdrawal Rules for Coronavirus

  • Must be impacted by coronavirus (either got sick or income loss).
  • Can withdraw up to $100,00 from a 401(k) or IRA without the 10% early withdrawal penalty.
  • Early distributions are still subject to income taxes. You can choose whether to pay the taxes in the same year as normal or spread the taxes over 3 years.
  • Can return the money withdrawn within 3 years. It will work the same as a rollover, and you can only do it if your plan allows rollovers. Can do this in one or more contributions. It will not count against your annual contribution limits.

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Have general questions about this post or want to learn more about a related topic? Please leave a comment at the bottom of the page. Comments are public, and I can’t provide individual advice, but it helps me make the posts more useful for the future. Please do not post personal information. If you need personal assistance, please contact the relevant government agency or hire an appropriate professional near you.

4 Comments on "What are the Early Retirement Distribution Rules During Coronavirus?"

  1. If my 2019 was increased by 20,000 because of a one time withdrawal from my NYS deferred comp account, that dramatically reduced my stimulus payment from $1200 to $400, is their any adjustment or is it just bad timing.

  2. If I take money out of an account; do I have to PAY IT BACK within three years? Or is it that I am just responsible for the tax amount?

    • You don’t HAVE to pay it back, but you will pay taxes if you don’t. The time to pay it back allows you to get the money back into your retirement account if you’re able.

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