Section 2202 of the CARES Act allows individuals to access up to $100,000 from their 401ks and IRAs with fewer consequences. The period in which you were able to do this expired in 2020.
Can you withdraw from your 401k and IRAs with no penalty due to COVID-19?
You might have heard that early retirement withdrawals were tax-free due to COVID-19, but there are many caveats. First, here’s who qualifies for the exemption under the CARES Act:
- If you or a family member had COVID-19 based on a CDC-approved test
- Or if you had financial consequences because of COVID-19 related conditions including:
- If you couldn’t work due to a lack of childcare
- If your place of work had to shut down or cut hours substantially
- Or if you were furloughed or laid off
Second, to ensure you get your CARES Act 401k withdrawal money tax-free and penalty-free, you’ll want to repay the amount you withdrew over the next three years. If it’s not paid back within three years, it will ultimately be taxed, and you will risk penalties and interest.
Finally, keep track of your 1099-R . Make sure to provide it to your Tax Pro and let them know that you took money out of a qualified retirement plan during 2020. The IRS will know you took this money out, so you want to make sure this is reported properly on your income tax return.
There is good news though! When President Trump signed the Consolidated Appropriations Act on Dec 27, 2020, he expanded some of the benefits from the CARES Act into the new year for 180 days. This includes no tax penalty for up to $100,000 in withdrawals from these accounts.