Coronavirus Law changes Retirement Plan Withdrawal Rules

Derieck Hodges |

Many Americans are facing financial straits due to being adversely affected by the coronavirus disease 2019 (COVID-19). To help provide relief, provisions were included in the new tax law; the Coronavirus Aid, Relief, and Economic Security (CARES) Act, to allow eligible individuals to take coronavirus-related distributions and loans from their retirement savings accounts. Certain limitations and rules are waived for coronavirus-related distributions and loans. These waivers make them more accessible and tempers any income tax consequences.

To help you determine if you are eligible for these provisions, we have provided the following summary.

Coronavirus-related Distributions of up to $100,000​​​

You may take coronavirus-related distributions of up to an aggregate amount of $100,000 at any time after January 1, 2020 and before December 31, 2020, from eligible retirement savings accounts. You are eligible to take coronavirus-related distributions if you fall into at least one of the following categories:

  • You were diagnosed with the virus SARS–CoV–2 or with coronavirus disease 2019 (COVID–19) by a test approved by the Centers for Disease Control and Prevention,
  • Your spouse or dependent was diagnosed with such virus or disease by such a test, or
  • You experienced adverse financial consequences as a result of being quarantined, being furloughed or laid off or having work hours reduced due to such virus or disease, being unable to work due to lack of child care due to such virus or disease, closing or reducing hours of a business owned or operated by the individual due to such virus or disease, or other factors as determined by the IRS.

 For this purpose, the following is a list of the eligible retirement savings plans from which you can take coronavirus-related distributions:

  • Traditional IRAs,
  • Roth IRAs,
  • Qualified retirement plans, such as a 401(k), profit sharing or pension plan,
  • 403(a)annuity plans
  • Eligible Governmental 457(b) deferred compensation plans, and
  • 403(b) plans.

Generally, when you take distributions from your retirement savings accounts, you must include the amount in your income for the year in which the distribution occurs, unless you roll over the amount within 60-days of receipt. In addition, any amount not rolled over within 60-days would be subject to an additional 10% tax (early distribution penalty), if the distribution is made while you are under age 59 ½, unless you qualify for an exception. However, relief is provided from these restrictions for coronavirus-related distributions. Relief includes:

  • Three years to roll over the amount. The three-year period begins on the day after the date on which the distribution was received.
  • Unless you elect otherwise, you can elect to spread the tax from the withdrawal over three years of income tax returns, beginning with 2020. And,
  • A waiver of the 10% early distribution penalty.

These relief provisions allow you to restore the amount to your retirement, should your finances return to normal during the next three years.  And, if you are unable to, or choose not to return the amount to your retirement savings, the three-year spread of the income could provide an opportunity for a reduction of the income tax that would be due if the amount was included in income in one year.

Coronavirus-related Loans of up to $100,000​​

If you participate in an employer sponsored retirement plan that includes loan a program, you might be able to borrow up to 100% of your vested account balance not to exceed $100,000, if you meet the requirements for a coronavirus-related distribution (above). If you don’t meet the requirements for a coronavirus-related distribution, the dollar limit is the usual $50,000.  Other requirements might apply that could affect the amount for which you are eligible. Please contact your plan administrator for details about your employer’s plan loan program, if any. 

What You Should Do Now

Take time to consider your options. If you have other savings, an assessment should be done to determine the most ideal source that should be used to cover any temporary financial need.

If it is determined that your retirement savings is the source that should be used- and you have more than one type of retirement savings account, your distribution planning strategy should include an assessment that identifies the account that is most suitable for taking your coronavirus-related distribution.

If you are not eligible for a coronavirus-related distribution or loan, or you need more than is available as a coronavirus-related distribution, we will help you to design and implement a solution that is suitable for your retirement planning profile.

 We Are Here to Help You

We understand that you would rather defer taking distributions from your retirement savings until you have actually retired. But, should these unforeseen circumstances force you to take distributions earlier than planned, the extended three-year rollover period provides a welcome opportunity to return the amount, where it would have the chance to grow tax-deferred.

We anticipate that you will have questions about these provisions. We are here to help you. Please do not hesitate to contact us with your questions.