As potentially heard, the Coronavirus Aid, Relief and Economic Security (CARES) Act allows for “qualified” people to obtain certain “coronavirus-related distributions” from their retirement plans without the necessity of paying tax.
So how does someone qualify? Rather, what’s a coronavirus-related distribution?
Early distribution basics
Generally, withdrawing money from an IRA or eligible retirement plan before you reach age 59½, necessitates a 10% early withdrawal tax in addition to any tax you may owe on the income from the withdrawal. This rule, however, exists with several exceptions. For example, if you become totally and permanently disabled or if you use the money to pay qualified higher education costs or medical expenses, you don’t owe the additional 10% tax.
New exception
In virtue of the CARES Act, you are able to take up to $100,000 in coronavirus-related distributions made from an eligible retirement plan between January 1 and December 30, 2020. These coronavirus-related distributions are not subject to the 10% additional tax that otherwise would generally apply to distributions made before you reach age 59½.
More so, a coronavirus-related distribution can be included in income in installments over a period of three years, and you have an additional three years to repay it to an IRA or plan. If you recontribute the distribution back into your IRA or plan within three years of the withdrawal date, you are able to treat the withdrawal and later recontribution as a totally tax-free rollover.
In new guidance (Notice 2020-50) the IRS spells out who qualifies to take a coronavirus-related distribution. A qualified individual is someone who:
- Is diagnosed (or whose spouse or dependent is diagnosed) with COVID-19 after taking a test approved for administration by the Centers for Disease Control and Prevention (including a test authorized under the Federal Food, Drug, and Cosmetic Act); or
- Experiences adverse financial consequences or ramifications as a result of certain events. To qualify under this test, the individual (or his or her spouse or member of his or her household sharing his or her principal residence) must:
- Be quarantined, be furloughed or laid off, or have work hours reduced due to COVID-19;
- Be rendered unable to work due to a lack of childcare due to COVID-19;
- Experience a business that he or she owns or operates due to COVID-19 shut down or have reduced hours;
- Have pay or self-employment income reduced because of COVID-19; or
- Have a job offer rescinded or start date for a job delayed due to COVID-19.
Favorable rules
As you can see, the rules allow many people — though not everybody — to take retirement plan distributions under the new exception. If you decide to take advantage of it, be sure to keep good records to show that you qualify. Be careful: You’ll be taxed on the coronavirus-related distribution amount that you don’t recontribute within the three-year window; however, you won’t have to worry about owing the 10% early withdrawal penalty if you’re under 59½. Other rules and restrictions may potentially apply. Contact us if you have questions or need assistance.