COVID-19 IRA Withdrawals: How to Take Money Out Without the 10% Penalty

Are you facing financial hardship due to the pandemic? Wondering if you can dip into your retirement savings without getting hit with penalties? Good news – the CARES Act created special provisions allowing penalty-free withdrawals from retirement accounts during the COVID-19 crisis

Let me walk you through everything you need to know about taking money from your IRA without penalties during these unprecedented times

Can I Really Withdraw from My IRA Without Penalty During COVID?

Yes you can! The Coronavirus Aid Relief, and Economic Security (CARES) Act, passed in March 2020, included special provisions for retirement account withdrawals. If you qualified, you could withdraw up to $100,000 from your IRA or other retirement plans without paying the usual 10% early withdrawal penalty.

But before you rush to tap your retirement funds, let’s dive into the details so you understand exactly how this works.

Who Qualified for Penalty-Free Withdrawals?

To be eligible for penalty-free COVID-related withdrawals, you needed to be a “qualified individual.” According to the IRS, this meant:

• You were diagnosed with COVID-19 by a CDC-approved test
• Your spouse or dependent was diagnosed with COVID-19
• You experienced “adverse financial consequences” due to:
  • Being quarantined, furloughed, or laid off
  • Having work hours reduced
  • Being unable to work due to lack of childcare
  • Owning a business that closed or reduced hours

The eligibility requirements were fairly broad, covering most people who suffered financial impacts from the pandemic.

Key Details About COVID-Related IRA Withdrawals

Here are the important facts you need to know:

• Withdrawal limit: Up to $100,000 total from all retirement accounts
• Deadline: Withdrawals had to be made by December 30, 2020
• Taxes: Still owed regular income tax, but could spread it over 3 years
• Repayment option: Could repay within 3 years to avoid taxes
• No 10% penalty: The usual early withdrawal penalty was waived

How Taxes Work on COVID Retirement Withdrawals

While the 10% penalty was waived, you still owed regular income taxes on traditional IRA withdrawals. However, the CARES Act provided flexibility in how you paid those taxes:

1. Three-year tax spread: You could include the income equally over three tax years (2020, 2021, and 2022) instead of all at once
2. Option to include all in one year: If preferred, you could include the entire distribution in your 2020 income
3. Repayment option: If you repaid some or all of the distribution within three years, you could file amended returns to get back taxes paid on the repaid amounts

Example:

If you withdrew $30,000 in 2020, you could report $10,000 on your 2020 tax return, $10,000 on your 2021 return, and $10,000 on your 2022 return. This prevented your income from jumping into a higher tax bracket in a single year.

Were Roth IRAs Treated Differently?

For Roth IRAs, the rules were a bit different. Since Roth contributions are made with after-tax dollars, you didn’t owe taxes on withdrawals of contributions. However, earnings withdrawn before age 59½ would normally be taxable and subject to the 10% penalty.

Under the CARES Act, even early withdrawals of Roth IRA earnings avoided the 10% penalty if you qualified. You still owed income tax on those earnings, but could spread the tax burden over three years.

How to Repay COVID Withdrawals to Avoid Taxes

One of the most generous aspects of the CARES Act was the option to repay COVID-related distributions within three years. If you did so, the withdrawals would be treated as if they were direct trustee-to-trustee transfers, meaning you wouldn’t owe federal income tax on them.

Here’s how repayment worked:

1. You could repay all or part of the distribution within three years of receiving it
2. Repayments were treated as rollover contributions
3. If you already paid taxes on the distribution, you could file amended returns to claim refunds
4. Repayments didn’t count toward the annual contribution limits

For example, if you took $30,000 in 2020 and reported $10,000 of income in each of 2020, 2021, and 2022, but then repaid the full amount in 2022, you could file amended returns for 2020 and 2021 to get back the taxes you paid.

Important Deadlines to Remember

• Withdrawal deadline: December 30, 2020
• Repayment deadline: Within 3 years of receiving the distribution
• Tax filing: Form 8915-E was used to report COVID-related distributions

How This Differed from Normal Early Withdrawals

Under normal circumstances, taking money from your IRA before age 59½ means:

1. Paying a 10% early withdrawal penalty
2. Owing income tax on the distribution (for traditional IRAs)
3. Limited exceptions for things like first-time home purchases, education expenses, or disability

The COVID provisions were much more flexible and forgiving than these normal rules.

Was My Plan Required to Offer These Options?

It’s important to understand that implementing the CARES Act provisions was optional for employers. Some retirement plans might not have allowed coronavirus-related distributions or loan modifications.

However, even if your plan didn’t specifically allow COVID-related distributions, you could still treat a qualifying distribution as coronavirus-related on your tax return if you met the eligibility requirements.

Alternatives to Retirement Account Withdrawals

Before taking money from your retirement accounts, you might have considered these alternatives:

• 401(k) loans: If your employer plan allowed it, you could borrow up to $100,000 or 100% of your vested balance (whichever was less) through September 22, 2020
• Loan repayment relief: The CARES Act allowed qualified individuals to delay loan repayments due between March 27 and December 31, 2020, for up to one year
• Unemployment benefits: Enhanced unemployment benefits provided additional income
• Stimulus payments: Direct payments to eligible individuals
• Emergency savings: Using emergency funds before tapping retirement accounts

Should I Have Taken a COVID Withdrawal?

Financial experts generally advise against taking early withdrawals from retirement accounts whenever possible. Even without the 10% penalty, there were significant drawbacks:

• Lost growth potential: Money withdrawn couldn’t grow tax-deferred
• Selling investments in a down market: Many accounts had declined in value during the early pandemic
• Long-term retirement impact: Taking $50,000 at age 45 could reduce retirement savings by $100,000+ by age 65

However, in true financial emergencies, the CARES Act provisions offered a valuable lifeline that was better than alternatives like high-interest credit card debt or payday loans.

What to Do If You Took a COVID Withdrawal

If you took advantage of the COVID withdrawal provisions, here are some steps to consider:

1. Create a repayment plan if possible to minimize tax impact
2. Keep track of tax filings across multiple years
3. Save documentation proving your eligibility for the coronavirus-related distribution
4. Consult a tax professional to ensure proper reporting
5. Rebuild your retirement savings as your financial situation improves

The Bottom Line

The CARES Act provided unprecedented flexibility for Americans needing to access retirement funds during the COVID-19 crisis. While the window for taking penalty-free distributions closed on December 30, 2020, those who took advantage of these provisions still have time to repay the distributions and avoid tax consequences.

Remember, while these provisions made early withdrawals less painful, tapping retirement accounts should generally be considered a last resort. If you did take a distribution, try to repay it if possible and get your retirement savings back on track.

Note: This article reflects information available as of October 2025. Tax laws and regulations can change, so always consult with a qualified financial professional before making significant financial decisions.