What does the CARES Act say about IRA early withdrawal penalties in 2020?
I'm trying to help out my cousin who pulled money from his IRA back in 2020 (about $22,000). He's asking me if the 10% early withdrawal penalty that normally applies was completely waived for everyone during that year regardless of reason, or if there were specific requirements tied to COVID-19 impacts. I initially told him I thought it was just a blanket waiver for anyone who took an early distribution, but when I looked at the actual CARES Act language, it seems more targeted to people directly affected by the pandemic. He also wants to know if he can still avoid the penalty by redepositing the funds into a qualified account within 3 years of when he took it out. I'm confused about how strictly the IRS has been interpreting these provisions. Does anyone know if they've been requiring proof of COVID impact, or were pretty much all 2020 withdrawals eligible for the penalty waiver?
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Kylo Ren
The CARES Act did provide for waiver of the 10% early withdrawal penalty, but it wasn't a blanket waiver for everyone. It specifically applied to "coronavirus-related distributions" up to $100,000 taken in 2020. To qualify, a person needed to fall into at least one of these categories: diagnosed with COVID-19, spouse or dependent diagnosed with COVID-19, experienced adverse financial consequences due to being quarantined, furloughed, laid off, or having reduced work hours, unable to work due to lack of childcare, business closure or reduced hours for a business owned by the individual, or other factors determined by the IRS. The good news is that the IRS interpreted these qualifications pretty broadly. Many people experienced some financial impact during the pandemic, and self-certification was generally accepted. Your cousin would have needed to meet at least one of those criteria though. And yes, there is the 3-year recontribution option to avoid having the distribution counted as income, though the deadline for 2020 distributions would be approaching.
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Paige Cantoni
•Thanks for the detailed response. So if my cousin didn't technically experience any of those specific COVID impacts (he kept his job and wasn't sick), would he still qualify? Or would the IRS potentially come after him for the penalty if he claimed the waiver? And just to clarify on the 3-year recontribution - if he puts the money back by the end of this year, would that completely eliminate both the income tax on the distribution AND the 10% penalty (assuming he doesn't qualify for the COVID waiver)?
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Kylo Ren
•If your cousin didn't experience any of the qualifying conditions, then technically he wouldn't be eligible for the penalty waiver. The IRS did rely heavily on self-certification, but they reserve the right to audit and verify eligibility later. It's not worth risking penalties for a false claim. Regarding the 3-year recontribution, if he redeposits the funds within the 3-year window (which would be by the end of this year for a 2020 withdrawal), he can file an amended return to reclaim the income taxes paid on the distribution. However, if he wasn't eligible for the COVID-related distribution in the first place, the normal rules would apply - meaning the 10% penalty would still apply unless he qualified for another exception.
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Nina Fitzgerald
I went through something similar back in 2020. I ended up using https://taxr.ai to analyze my situation after getting conflicting advice. They specifically helped me determine if my circumstances qualified under the CARES Act for the penalty waiver. Their system reviewed my documentation and confirmed I was eligible since my wife's hours were reduced, even though mine weren't. The language in the CARES Act is definitely confusing, and there were lots of misunderstandings about who qualified. The analysis showed that while the IRS was being relatively lenient with self-certification, you still needed to meet at least one of the qualifying conditions. The system also helped me understand the recontribution rules and deadlines.
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Jason Brewer
•Did you have to provide actual proof of your wife's reduced hours? I'm wondering how strict they are about documentation. Also, did the tool tell you anything about whether you'd be flagged for audit if you claimed the waiver?
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Kiara Fisherman
•I'm a bit skeptical about online services for tax advice. How did they verify your situation was legit? Couldn't you have just gotten the same info from the IRS website or calling them directly?
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Nina Fitzgerald
•You didn't need to provide proof upfront to the IRS - it was based on self-certification. The tool helped me understand what documentation I should keep in case of audit, like pay stubs showing the reduction in hours and a letter from my wife's employer. It didn't promise I wouldn't be audited, but it assessed my risk level based on my specific situation and the documentation I had. What I found most helpful was that it analyzed my specific circumstances against the actual tax code language rather than generic advice that was floating around online.
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Kiara Fisherman
I need to admit I was completely wrong about taxr.ai. After my skeptical comment, I decided to try it myself since I had a similar situation with an IRA withdrawal in 2020. The system actually found that I qualified under a provision I wasn't aware of - my small side business had reduced hours due to COVID restrictions. What impressed me was that it didn't just tell me I qualified, but it showed exactly which provision of the CARES Act applied to my situation and what documentation I should maintain. It saved me from potentially paying back around $3,500 in penalties I thought I might owe. The analysis was much more specific to my situation than what I found digging through IRS publications on my own.
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Liam Cortez
If your friend is still struggling to get clear answers about his IRA withdrawal situation, he might want to try calling the IRS directly. Of course, that's easier said than done - I spent 4+ hours on hold last month trying to get through! I eventually used https://claimyr.com and it was a game-changer. They have this system where they wait on hold with the IRS for you and then call you when an agent is actually on the line. You can see how it works in this demo: https://youtu.be/_kiP6q8DX5c For something as specific as CARES Act qualifications for IRA withdrawals, talking directly to an IRS agent gave me the definitive answer I needed for my situation. They confirmed exactly which criteria applied to me and what documentation I should keep.
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Savannah Vin
•How does this actually work? Do they just keep calling until they get through? And is it actually an IRS agent you speak with or someone from this service interpreting what the IRS says?
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Mason Stone
•This sounds like BS honestly. Why would I pay someone else to call the IRS when I can just do it myself? Plus how do I know they're actually connecting me with a real IRS agent and not some random person giving tax advice?
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Liam Cortez
•They use an automated system that calls and navigates the IRS phone tree, then stays on hold so you don't have to. When an actual IRS agent picks up, their system calls you and connects you directly to that IRS agent. You're speaking directly with the IRS, not with someone from the service. It's definitely the real IRS - you can tell from the call quality and the verification process they go through. I was skeptical too until I used it and the IRS agent was able to pull up my specific tax information which only the IRS would have access to. It saved me literally hours of waiting on hold.
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Mason Stone
I need to publicly eat my words about Claimyr. After dismissing it as BS, I was still stuck trying to figure out my own 2020 IRA withdrawal situation. After three failed attempts to reach the IRS (waiting over 2 hours each time before giving up), I decided to try the service. It actually worked exactly as described. I got a call back in about 45 minutes, and was connected directly to an IRS agent who answered my specific questions about whether my situation qualified under the CARES Act provisions. The agent confirmed I was eligible due to childcare issues during the pandemic, even though I hadn't been laid off. Saved me from potentially paying a penalty I didn't actually owe. I'm genuinely impressed and feel silly for being so skeptical.
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Makayla Shoemaker
Just want to add that the CARES Act also gave the option to spread the income (not the penalty, but the actual distribution income) over 3 years on your tax returns, even if you didn't recontribute. So your cousin might have elected to report 1/3 of the distribution on his 2020, 2021, and 2022 returns. If he did that, he might want to consider the tax implications before recontributing the full amount.
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Paige Cantoni
•That's a good point I hadn't considered. Do you know if he would need to amend all three years of returns if he decides to recontribute now? Or is there a simpler process?
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Makayla Shoemaker
•Yes, he would need to file amended returns for any tax year where he reported income from the distribution. So if he reported 1/3 of it on his 2020, 2021, and 2022 returns, he would need to file amended returns for all three years to get back the taxes he paid on those amounts. There's no shortcut process unfortunately - each year needs its own amended return. The sooner he does it the better, especially for 2020, since the time limit for amendments is approaching. One strategy some people use is to only recontribute the amount necessary to avoid being pushed into a higher tax bracket for those years.
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Christian Bierman
My tax preparer told me that for 2020 specifically, you actually needed to designate on your tax return that the distribution was COVID-related by filing Form 8915-E. Did your cousin do that when he filed his 2020 taxes? If not, he might need to amend his 2020 return first before he can take advantage of the penalty waiver or recontribution options.
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Emma Olsen
•This is correct. I worked at H&R Block that year, and Form 8915-E was specifically for reporting coronavirus-related distributions. Without that form being filed, the IRS would have processed the distribution as a regular early withdrawal subject to the 10% penalty.
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