Retirement tax questions

Here is some information about taking a distribution from your 401k:

Penalty Waived for Early Retirement Withdrawal

If you need to take money out of your retirement plan ASAP, keep in mind that the 10 percent early withdrawal penalty may be waived on up to $100K of retirement funds withdrawn if you are a qualified individual impacted by Coronavirus.  You are a qualified individual if:

• You, your spouse, or dependent are diagnosed with Coronavirus 
• You experience adverse financial consequences as a result of being quarantined, furloughed, or laid off
• You had hours reduced due to Coronavirus
• You are unable to work due to your child care closing or reducing hours

Additionally, income attributable to such distributions would be subject to tax over three years, and you may recontribute the funds to an eligible retirement plan within three years without regard to that year’s cap on contributions.

So, you are correct that the 10% early distribution penalty will be waived if you are a qualified individual impacted by Coronavirus.  However, any amount that is distributed from the 401k will be added to your income and taxed as ordinary income.  The Federal taxes withheld from the distribution should help to cover any additional taxes that you may owe when the income from the 401k distribution is added to your other income.  But, you are not guaranteed that the withholding will be all that you will need to pay when the distribution is added to your other income.  

Also, you can spread out the taxes over the course of three years according to the information above instead of having it all taxed in a single year.  Until we see the tax return information for 2020, there are no additional details for how this will actually be done.  

@AmandaRaeJean4