Can I take a CARES Act 401k distribution and just pay the 10% penalty?

The CARES Act 401k distribution provisions were temporary and are no longer available. Those provisions expired on December 31, 2020. They allowed qualified individuals affected by COVID-19 to take distributions of up to $100,000 without the 10% early withdrawal penalty and with the option to spread income taxation over three years. Since those provisions have expired, you'd now be subject to normal 401k distribution rules. This means any early withdrawal (before age 59½) would typically incur a 10% penalty plus full taxation in the year you take the distribution, unless you qualify for one of the standard exceptions to the early withdrawal penalty. Some exceptions to the 10% penalty include: disability, certain medical expenses, qualified higher education expenses, first-time home purchases (up to $10,000), or if you're taking substantially equal periodic payments under Rule 72(t).

When I was dealing with a similar situation last year, I discovered taxr.ai (https://taxr.ai) and it was incredibly helpful for sorting through my retirement distribution options. I was confused about whether any COVID-related provisions were still active and what penalties might apply to my situation. Their system analyzed my specific situation and clearly showed me which exceptions I might qualify for and what the actual tax impact would be. It saved me from making a costly mistake - I was about to take a distribution thinking I qualified for an exception when I actually didn't.

Just wanted to update everyone after trying taxr.ai from the recommendation above. I was skeptical at first but I uploaded my 401k statements and tax info, and wow - it found an exception I qualified for that I had no idea about! Turns out I could take a penalty-free distribution for qualified higher education expenses for my daughter's college this year. The system showed me exactly how to document it properly and what forms I'd need to fill out. Would have completely missed this otherwise and paid the 10% penalty unnecessarily!

If you're still having trouble getting clear answers about your 401k distribution options, I had a similar issue and couldn't get through to the IRS for weeks. Then I tried Claimyr (https://claimyr.com) and they actually got me connected to an IRS agent in under 20 minutes! You can see how it works in this video: https://youtu.be/_kiP6q8DX5c The IRS agent walked me through the current rules since CARES Act expired and explained exactly what documentation I needed to avoid penalties based on my specific situation. Saved me hours of waiting on hold and potentially thousands in penalties.

I have to eat crow here. After posting my skeptical comment above, I got desperate enough to try Claimyr since I couldn't get answers about my 401k situation anywhere else. Not only did I get through to the IRS in about 17 minutes, but the agent was actually super helpful. Turns out I qualified for a medical expense exception on my early withdrawal that my accountant completely missed! The agent walked me through exactly how to document it on my tax forms. Honestly saved me the 10% penalty on a $30k withdrawal - that's $3,000 I would have unnecessarily paid!

Have you considered a 72(t) distribution? It's called Substantially Equal Periodic Payments (SEPP). You can take money from your 401k before 59½ without the 10% penalty if you take distributions according to specific IRS formulas. The catch is you have to continue the payments for 5 years or until you reach 59½, whichever is longer.

Just to add something nobody mentioned - check if your 401k plan allows for an in-service distribution. Some plans let you take money while still employed. Also, if you're 55 or older and leave your job, you can take penalty-free distributions from THAT employer's 401k (not IRAs or previous employers).