Special Rules for Use of Retirement Funds

The CARES Act allows individuals to make up to $100,000 in coronavirus-related distributions from their retirement accounts that would otherwise be subject to the 10% additional tax on early withdrawals.  Eligible retirement plans from which the distributions may be withdrawn include IRAs, qualified employer-sponsor retirement plans, 403(a) annuity plans, 403(b) tax sheltered annuity plans, and 457(b) plans.

What is a coronavirus-related distribution, and who is eligible to receive them?  These would include distributions made during the 2020 calendar year to an individual, or an individual’s spouse or dependent, who is diagnosed with the virus with a test approved by the CDC, or to an individual who experienced adverse financial consequences as a result of the virus.  Adverse financial consequences include being quarantined, furloughed or laid off, having work reduced hours, or being unable to work due to lack of child care. This can provide a huge benefit to those struggling with cash flow during this difficult time, and the distributions are subject to income tax deferral, or may be treated as a rollover and avoid taxation altogether.  

The coronavirus-related distributions in 2020 would be included in gross income ratably over the next three years, 2021–2023, unless the recipient elects to treat the distributions as an eligible rollover. To make the election, the recipient would need to repay the distributions into a qualified retirement account within the three year period starting from the date the original distribution was withdrawn from the account in 2020. These contributions during 2021-2023 would be treated as eligible rollovers, which therefore would not be subject to income tax and not counted against the annual contribution limits to retirement accounts. Additionally, loans from qualified plans are also amended under the CARES Act. The maximum limit on loans from qualified employer retirement plans has been increased from $50,000 to $100,000.  Typically loans from qualified plans must be repaid within 5 years. Under the CARES Act, if the due date of any outstanding loan as of March 27, 2020 falls between between March 27, 2020 and December 31, 2020, the due date is delayed for one year.  All payments and accrued interest on these loans are also delayed for one year.

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