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IRA Penalty-Free Distributions

Ordinarily, a 10% penalty tax generally applies to distributions from an employer retirement plan or individual retirement account (IRA) before age 59½ unless an exception applies. Some IRA exceptions include

  • Disability
  • Beneficiary of deceased IRA owner
  • Substantially equal periodic payments
  • To the extent of certain medical expense

However, due to the coronavirus pandemic, the penalty tax will not apply to up to $100,000 of coronavirus-related distributions during 2020.

While the distributions are penalty-free, regular income tax still applies. However, the income resulting from a coronavirus-related distribution may be spread over three-years for tax purposes unless an individual elects otherwise. Coronavirus-related distributions can also be paid back to an eligible retirement plan within three years after the distribution was received. And, an individual who receives a coronavirus-related distribution may, at any time during the 3-year period, rollover all or any portion to a qualified plan or to an IRA.

For purposes of the distribution and loan rules described here, “coronavirus-related” applies to individuals diagnosed with the illness or who have a spouse or dependent diagnosed with the illness, as well as individuals who experience adverse financial consequences as a result of the pandemic. Adverse financial consequences could include quarantines, furloughs, and business closings.

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