CARES Act Retirement Account Distributions

By JoAnn Huber

May 18, 2020

CARES Act Retirement Account Distributions

Before the pandemic, people weren’t allowed to withdraw money from their IRAs for purposes not related to their retirement. However, the CARES Act includes special provisions permitting coronavirus-related distributions and loans from retirement accounts. Beyond these distributions and loans, the CARES Act also has provisions for those who wish to preserve their retirement funds as certain required minimum distributions have been suspended.

Coronavirus-Related Distributions for 2020

The CARES Act provides special provisions for those who are seeking access to their retirement funds. Qualifying individuals can take Coronavirus-Related Distributions (CRD) of up to $100,000 from IRAs and company plans in 2020. These special provisions don’t apply to all individuals, so making sure you qualify before making any transactions is crucial. The CARES Act specifies that the distributions are only available for individuals who have experienced health and/or financial impacts from the virus. The Act specifies you must meet one of the following criteria to qualify for the CRD:

  • Any individual…
    • diagnosed with COVID-19 by a test approved by the Centers for Disease Control and Prevention
    • whose spouse or dependent who is similarly diagnosed
    • who experiences adverse financial consequences due to the coronavirus as a result of being
      • Quarantined, furloughed, laid off, or having work hours reduced; or
      • Unable to work due to lack of childcare; or
      • A business owner who has had to close or reduce the hours of their business.

It’s possible that additional criteria expanding eligibility may be released in the future by the Treasury.

Another important eligibility requirement is that the individual must have the ability to access the funds to take a distribution. Most individuals can take distributions from their IRAs without any issue. However, receiving distributions from employer-sponsored retirement plans may not be possible in certain instances because some plans may not allow current employees to take distributions from the plan. Individuals without access to their funds cannot take a distribution even if it would be treated as a CRD.

Benefits of Coronavirus-Related Distributions

There are several potential benefits available to individuals taking CRDs. The benefits include the following (discussed in more depth below):

  • Waiving the 10% early distribution penalty;
  • Allowing income from the distributions to be reported as income over three years;
  • Permitting repayments of any portion of the distributions up to three years after the CRD was received;
  • No mandatory income tax withholding on employer-sponsored retirement plan distributions; and
  • Enhanced access to funds held in employer-sponsored retirement plans.

Waiver of 10% Early Distribution Penalty

Typically, there is a 10% additional tax, often called a “10% penalty,” for taking distributions from a qualified retirement plan such as an IRA or 401(k) before age 59 ½. As part of the CARES Act, Congress now allows a waiver of this 10% tax for any CRD. The distribution will still be subject to ordinary income tax.

Income Spread Over Three Years

The income from Coronavirus-Related Distributions taken during 2020 will be reported on your individual tax return evenly over 2020, 2021, and 2022. This allows you to spread the tax liability over three years but get the cash you need now to meet your needs. An individual may elect out of the default three-year spread and include all of the income on their 2020 income tax return. It’s vital to work with your tax advisor to see which option is best for you based on your individual situation. It may be best to elect out of the three-year spread for those who have unusually low income in 2020 but expect to return to normal income in 2021.

Coronavirus-Related Distributions May Be Repaid for Up to Three Years

Another benefit is the ability to repay some or all of the distribution for up to three years. The repayment can be completed by rolling the distribution back into the same account from which it was taken or by rolling it into another eligible retirement account. You may repay the funds all at once or via multiple payments. However, all repayments must be completed within the three-year period, which begins on the day after the Coronavirus-Related Distribution is received. If the funds are repaid after an income tax return has been filed reporting the income, an amended return will need to be filed to claim a refund for the excess income taxes paid. If you spread the income over three years, you may have to file three amended tax returns.

No Mandatory Income Tax Withholding on Employer-Sponsored Retirement Plan Distributions

Usually, distributions taken from employer-sponsored retirement plans are subject to a mandatory 20% withholding requirement. This money is sent to the U.S. Treasury as a prepayment of your income tax liability. Coronavirus-Related Distributions are not subject to this withholding. This means the full amount is available for you to spend as needed. However, since the distribution is subject to income tax, you need to make sure you have enough cash to pay the tax liability later if you choose not to have any income tax withheld.

Enhanced Access to Funds Held in Employer-Sponsored Retirement Plans

Typically, in employer-sponsored retirement plans, participants have limited access to the funds in their employer-sponsored retirement plans, which means they may not be able to take distributions. This is especially true for employees under age 59 ½ if they are still working for the plan sponsor. One important thing to remember is that although the law allows for Coronavirus-Related Distributions, the employer plan may not permit such distributions. For those plans that do allow CRD, the maximum distribution amount is $100,000.

Is a Coronavirus-Related Distribution Right For Me?

Even though the CARES Act allows you to take a Coronavirus-Related Distribution of up to $100,000, the question remains as to whether this is right for you. For some, a CRD may help weather the financial storm of your life during this unprecedented time. But for others, it may offer a unique financial or tax planning opportunity. A decision to take these funds out of your retirement account early should not be taken lightly. There are some precautions to keep in mind as you make this big decision. Please contact us before instigating any CRD as we can discuss with you your options and the financial and tax implications of a CRD.

Employer-Sponsored Retirement Plan Loan Relief

The CARES Act also provides some relief related to employer-sponsored retirement plan loans. These loan provisions are available to the same group of qualified individuals specified above. The plan loan relief applies as follows:

  • The maximum amount of plan loans is increased to the lesser of $100,000 (reduced by other outstanding loans) or 100% of the vested account balance. Usually, the maximum amount that can be borrowed is the lessor of $50,000 or 50% of vested plan balance;
  • This relief applies to loans taken by September 23, 2020;
  • Any loan repayments normally due between March 27, 2020, and December 31, 2020, may be delayed for up to one year.

These provisions apply only to employer-sponsored retirement plans as loans are not allowed from IRAs.

Required Minimum Distribution Suspended in 2020

One provision of the CARES Act is to waive the required minimum distribution (RMD) from IRAs and other retirement accounts for 2020. The waiver applies to both the original account owners and those who inherited the account. This suspension applies to IRAs, SEP IRAs, SIMPLE IRAs, 401(k)s, 403(b)s, and 457(b) government plans. However, it does not apply to a 457 plan sponsored by a non-government tax-exempt employer. If your retirement assets have taken a hit from current market conditions, not having to take an RMD may allow them to recover some value before you liquidate them.

The waiver also applies to those individuals who were required to take their first RMD by April 1, 2020. For traditional IRA owners, this would be those who turned 70 ½ in 2019. For employer-sponsored retirement plans, the required beginning date will depend on the plan documents. Some plans allow plan participants to defer RMDs past age 70 ½ until they retire.

Under the CARES Act, you can waive the 2019 RMD if you hadn’t taken it by December 31, 2019. This waiver only applies to those who were taking their first RMD. However, if you had taken the RMD by year-end, you must include the RMD in your gross income. Those who procrastinate until 2020 to take their first RMD can skip the first two RMDs. All other individuals who failed to take their RMD by December 31, 2019, need to take it now to avoid paying further penalties.

It’s important to remember that the waiver applies only to 2020, so RMDs will need to be resumed in 2021.

Returning 2020 RMDs If Already Taken

Some individuals had already taken some or all of what they thought were RMDs early in the year prior to the passing of the CARES Act in late March 2020. These distributions are no longer required and, in some cases, are unwanted distributions. Unfortunately, not all RMDs will be able to be returned. Beneficiaries who took their RMDs before the CARES Act was passed have no way to return the RMDS.

60-Day Rollover

There are two different ways the money may be returned. The first scenario is available to those who took a distribution as far back as February 1, 2020. The distribution is returned by taking advantage of the 60-day rollover rules. In simple terms, an individual can deposit an amount equal to the distribution back into a retirement account within 60 days. Once this is done, the funds are no longer treated as a distribution. However, the actual rules are complicated. One of the most significant sticking points is that a 60-day rollover can only be used once every 365 days. Another requirement is that the funds have to be returned within 60 days. Section A of Notice 2020-23 extended the 60-day window to allow distributions as far back as February 1, 2020, to be rolled over until July 15, 2020.

Example 1:

Bob and Sally Smith receive monthly distributions of $2,000 from Sally’s IRA. This means Sally had received three distributions in 2020 before the CARES Act was passed. Under the 60-day rollover rule, Sally would only be able to return $2,000 to her IRA by July 15, 2020, representing either the February or March distribution leaving her with $4,000 of taxable income from IRA distributions.

Example 2:

Let’s change the example so the distribution from Sally is done on a quarterly basis, and she received $6,000 in February 2020. In this situation, Sally can return the entire $6,000 to her IRA by July 15, 2020, and not have any taxable income from IRA distributions.

Example 3:

Let’s assume that Sally changed financial advisors in September 2019 and did not use a trustee-to-trustee transfer to change her IRA custodian. Instead, she received a check written to her from her former IRA custodian for the account balance. Sally then deposited the funds in an IRA account with her new IRA custodian. Because she did a 60-day rollover in the last 365 days, she’s ineligible to take advantage of this to return the unwanted IRA distribution. Under both Example 1 and Example 2, Sally would have to recognize $6,000 of taxable income from IRA distributions because she isn’t eligible to do another 60-day rollover at this point.

In Example 1, there are a couple of other options that Sally can consider. If she’s still a participant in a qualified retirement plan, she can rollover the IRA distributions to her qualified plan. There is no limit on the number of IRA-to-qualified plan rollovers within 365 days. Another option for Sally in Example 1 is to contribute either the February and/or March distribution to a Roth IRA. This “Roth conversion” is subject to the 60-day rollover time limit. However, it isn’t considered an IRA-to-IRA rollover for purposes of the once per 12 months rule. Sally will still have to pay tax on the distribution, but it will be able to grow tax-free.

Coronavirus-Related Distributions to Return Unwanted RMDs

The second method to return an unwanted RMD is to treat the distribution as a Coronavirus-Related Distribution. For qualifying individuals, this approach allows relief for distributions taken in January 2020 or those impacted by the one-per-year rollover rule. The rules for Coronavirus-Related Distributions are above in more detail.

IRS information site. The rules surrounding Coronavirus-Related Distributions continue to evolve. We encourage you to make sure you are relying on the latest information as you make decisions. Ongoing information on the IRS and tax legislation response to COVID- 19 can be found at

We Help with CARES Act Retirement Account Distributions

We understand that the CARES Act can be difficult to navigate, especially when considering distributions from retirement accounts. We’re here to help guide your through the process. If you would like to see if utilizes the CARES Act retirement account provisions for a distribution reach out to us. You can call us at 913-393-1000 or schedule a complimentary consultation below to start the process. We look forward to helping you.

On a more personal note, we know the pandemic has affected each one of you in different ways. Please know that we are thinking of you and are here to guide you through your financial decisions. We wish all of you the very best in this difficult time.

JoAnn Huber, CPA, PFS, CFP®
Partner + Tax Specialist

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The views expressed represent the opinion of Modern Wealth Management an SEC Registered Investment Advisor. Information provided is for illustrative purposes only and does not constitute investment, tax, or legal advice. Modern Wealth Management does not accept any liability for the use of the information discussed. Consult with a qualified financial, legal, or tax professional prior to taking any action.