The Coronavirus Aid Relief and Economic Security (CARES) Act has removed the 10% penalty for early withdrawals from retirement plans, if the withdrawal is for “Coronavirus related distributions”.
This applies to all defined retirement plans such as:
- 401(K)
- 403(B)
- 457(B)
- IRAs
The distribution (or withdrawal) must not exceed the value of $100,000 for any taxable year and must be recontributed within three years. The recontributions maybe done in a one-off payment or staggered (as long as it is within the three-year time limit). There will be no contribution limits when repaying the initial distributions.
If the taxpayer is unable to repay the distribution within the three-year period allocated, any amount that will be included in the gross income of the taxpayer will be included rateably over the three taxable years.
Coronavirus Related Distributions
The IRS defines “Coronavirus related distributions” as any distribution from an eligible retirement plan made:
- On or after 1st January 2020 and before 31st December 2020
- To an individual
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That has been diagnosed with either the SARS-CoV-2 or COVID-19 by a test that is approved by the Centres for Disease Control and Prevention
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Whose spouse or dependant has been diagnosed with the diseases mentioned, again by a test that is approved by the Centres for Disease Control and Prevention
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That experiences adverse financial consequences as a direct result of being in quarantined, being made redundant/furloughed or having to work reduced hours as a result of COVID-19.
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That is unable to work due to lack of childcare arising from COVID-19
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That faces business closure or reduced business hours for a business they own arising from COVID-19
Taxpayers residing in the UK will also need to consider the UK tax implications of any withdrawal.
Waiver of Minimum Distribution Rules
The CARES act has removed the rules regarding minimum distributions for all taxpayers, regardless whether they have been impacted by COVID-19.
As a brief overview the rules apply to those aged 72 or above as they are required to withdraw a certain amount from retirement accounts each year or their Required Minimum Distribution (RMD).
The act allows for a certain flexibility on whether taxpayers wish to withdraw finances or not for 2020.
Unfortunately, those that have already taken their 2020 RMD will not be able to put it back and the distribution therefore will be treated as a normal distribution and be taxable.
For those with an inherited IRA RMD required date during 2020, the waiver of the rules still applies and the year 2020 will be a disregarded year in any five-year plans.
