IRA early deduction penalty suspended cares act covid

[elburro66]

The 10% penalty has been suspended for early IRA deductions as part of the cares act.  How strict is the its in enforcing their vague "related to covid" wording?  I did have covid in January 2021.  I quit my job in February 2021 partly because of how my coworkers were treating me post covid.  Thus I "retired" at 54 and started taking early withdrawals from my IRA to replace my income.  I have been paying the 10% penalty in addition to income taxes on my early withdrawals, but it appears I can stop paying the 10% penalty because of the CARES Act.  How does the IRS verify, check, audit these claims?  How stringent has the IRS been on people who took advantage of this law's provision in 2020?

[macuser_22]

The law only applies to 2020 distributions taken in 2020 because of COVID.

This is from the IRS website:

Q3. Am I a qualified individual for purposes of section 2202 of the CARES Act?

A3. You are a qualified individual if –

• You are diagnosed with the virus SARS-CoV-2 or with coronavirus disease 2019 (COVID-19) by a test approved by the Centers for Disease Control and Prevention;

• Your spouse or dependent is diagnosed with SARS-CoV-2 or with COVID-19 by a test approved by the Centers for Disease Control and Prevention;

• You experience adverse financial consequences as a result of being quarantined, being furloughed or laid off, or having work hours reduced due to SARS-CoV-2 or COVID-19;

• You experience adverse financial consequences as a result of being unable to work due to lack of child care due to SARS-CoV-2 or COVID-19; or

• You experience adverse financial consequences as a result of closing or reducing hours of a business that you own or operate due to SARS-CoV-2 or COVID-19.

Under section 2202 of the CARES Act, the Treasury Department and the IRS may issue guidance that expands the list of factors taken into account to determine whether an individual is a qualified individual as a result of experiencing adverse financial consequences. The Treasury Department and the IRS have received and are reviewing comments from the public requesting that the list of factors be expanded.

https://www.irs.gov/newsroom/coronavirus-related-relief-for-retirement-plans-and-iras-questions-and-...

[Bsch4477]

The article cited below suggests that the penalty free distribution applies to withdrawals before June 25, 2021 but I can’t confirm that on any IRS site. Just having a positive Covid test qualifies you. 

https://holtzmanpartners.com/2021/08/04/thinking-about-a-cares-act-401k-withdrawal-heres-what-you-ne...

[macuser_22]

---

@Bsch4477 wrote:

The article cited below suggests that the penalty free distribution applies to withdrawals before June 25, 2021 but I can’t confirm that on any IRS site. Just having a positive Covid test qualifies you. 

https://holtzmanpartners.com/2021/08/04/thinking-about-a-cares-act-401k-withdrawal-heres-what-you-ne...

---

I haven looked at that legislation - you could be right but that would be a 2021 distribution reported on a new form that does not presently exist yet.  That would not be the CARES act.

The IRS says:

Q4. What is a coronavirus-related distribution?   

A4. A coronavirus-related distribution is a distribution that is made from an eligible retirement plan to a qualified individual from January 1, 2020, to December 30, 2020, up to an aggregate limit of $100,000 from all plans and IRAs. 

[Opus 17]

---

@Bsch4477 wrote:

The article cited below suggests that the penalty free distribution applies to withdrawals before June 25, 2021 but I can’t confirm that on any IRS site. Just having a positive Covid test qualifies you. 

https://holtzmanpartners.com/2021/08/04/thinking-about-a-cares-act-401k-withdrawal-heres-what-you-ne...

---

I don't think this is correct.  I found the section and I now remember discussing this with the group previously.

The Consolidation bill extends the special tax treatment given to COVID distributions to any other disaster that might have been declared between Jan 1, 2020 and 60 days after the bill was enacted.  It specifically excludes from the definition of "disaster", anything having to do with COVID if COVID is the only reason a disaster was declared.  

Division EE of the consolidated appropriations act, Title III, section 301, page 1889 of this pdf.

PDF (5MB)

I do not believe the taxpayer here is entitled to any relief on the 10% penalty for early withdrawals.  In any case, since these are 2021 withdrawals, they will be reported on next year's tax return, and I suppose the law might change before then.

Even if the law blog is correct, it only applies to withdrawals made before June 25, and not to withdrawals after that date, even if the taxpayer retired before that date.

[Opus 17]

One other comment.  Is this really an IRA, or is this a 401(k), 403(b), or other qualified workplace plan?  Generally, you can withdraw from a workplace plan without paying the 10% penalty if you separate from service in the year you turn 55 or older.  If this is a qualified workplace plan, then as long as your 55th birthday is before 12/31/21, you would not pay the penalty.

It is terribly important to remember and be aware that workplace plans (401k, 403b, 457, 401a, etc.) are controlled by separate laws and may have important differences from IRAs even though their operation is similar.