The ABCs of coronavirusrelated distributions

The CARES Act relief includes coronavirus-related distributions, or CRDs, that allow qualified individuals to take up to $100,000 of coronavirus-related distributions from individual retirement accounts and company plans during 2020 without incurring the 10% penalty normally imposed when such withdrawals are made by individuals who aren’t yet 59½. The $100,000 limit is the overall total that can be withdrawn by any individual, with IRA and company retirement plan withdrawals aggregated for this purpose.

Further, the law allows the distributions to be repaid to IRAs or company plans and permits the federal income tax on withdrawals that are not repaid to be spread out equally over three years. There are no restrictions on how the distributed funds are used.

Who qualifies?

Relief is available only to qualified individuals, a category that includes a great many people, but not everyone. It includes:

  1. Individuals diagnosed with the SARS-CoV-2 or COVID-19 virus by a test approved by the CDC;
  2. Individuals whose spouse or dependent is diagnosed; and
  3. Individuals who experience “adverse financial consequences” from:

The law gives the Treasury Secretary the authority to expand this definition.

Example 1: José owns a five-star Spanish tapas restaurant. As a result of the pandemic, he had to close his dining room and now only offers curbside pick-up. He has also been forced to reduce his hours of operation. José has experienced adverse financial consequences and is a qualified individual.

Example 2: Tori, an architect, is fortunate in that neither she nor her spouse or dependents have been diagnosed with COVID-19. She has not been quarantined and has retained her job without a reduction in hours. However, Tori has experienced a sharp decline in the value of her 401(k) and IRA investments. Under the CARES Act definition, Tori has not experienced adverse financial consequences and is not a qualified individual.

Retroactive relief

CRDs include any distribution taken in 2020, so distributions taken between Jan. 1 and March 26 — before the date the CARES Act was enacted — also qualify.


Individuals who take CRDs can repay the withdrawals within three years to a retirement account. The three-year period begins on the day after the date the funds were received. Individuals can make one or more repayments during the three years. The repayments can be made to any retirement plan to which the original distribution could have been rolled over. Repayment does not have to be made to the account from which the CRD originated.

If individuals pay income tax on their distribution and then later recontribute the funds to a retirement plan, they will be able to file an amended tax return to recover the taxes paid. Individuals can elect not to spread the income from the CRD over three years but instead include the total amount in income for 2020.

While those over age 59½ will not benefit from the re 10% penalty relief, the ability to spread income from CRDs over three years and repay those distributions may prove helpful.

Roth IRA effect

It appears the law allows repayments to go to a Roth IRA, which would create a three-year income spread on a Roth conversion for qualified individuals. This was likely not the intent of Congress, and the IRS will have to provide clear guidance on this point. Converting to a Roth IRA is not one of the health and financial hardship situations stated in the law and it could potentially even be seen as abusive by either Congress or the IRS.

IRAs versus company plans

When disaster strikes, clients want their money, and they want it fast. For individuals with both IRA and company plan funds, their IRA will usually be the better choice for CRDs.

IRA distributions can be made easily and quickly, without the plan red tape. For one thing, clients withdrawing from a retirement plan will be required to deal with the plan administrator or company HR department. During these times, those staffers may be difficult to reach. In addition, CRDs are optional for company plans. They don’t have to allow them.

Of course, taking early withdrawals from an IRA or company plan is never ideal. During a crisis, if there is another available source of funds, advisers should recommend that those dollars be tapped first.

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Written by Investors Wallets

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