As part of the Coronavirus Aid, Relief and Economic Security (CARES) Act, “qualified” individuals are able to take some “coronavirus-related distributions” from their retirement plans without paying taxes. 

This provision potentially benefits a number of people, but who exactly qualifies and what is considered a “coronavirus-related distribution”?  

What is early distribution?

Prior to the coronavirus pandemic, if you withdrew money from an IRA or another eligible retirement plan before the age of 59½, you had to pay a 10% early withdrawal tax. Moreover, you had to pay taxes on income from the withdrawal. There were exceptions to this rule, though: if you become totally and permanently disabled or if you use the distribution was used to pay for qualified higher education  or medical expenses, you didn’t owe the additional 10% tax.

The new exception

The CARES Act now allows qualified individuals to take up to $100,000 in coronavirus-related distributions made from eligible retirement plans until December 30, 2020. These distributions aren’t subject to the aforementioned 10% additional tax. 

Moreover, these distributions can be included in your income in installments over a three-year period and you have up to three years to repay the distribution. If these funds are contributed back into an IRA or plan within the three year period, they are treated as a tax-free rollover.

Who qualifies, though?

As per IRS guidance (Notice 2020-50), a qualified individual is someone who:

• Is diagnosed (or whose spouse or dependent is diagnosed) with COVID-19 after taking a test approved 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 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 unable to work due to a lack of childcare because of COVID-19;
  • Experience a business that he or she owns or operates due to COVID-19 close 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  • Have a job offer rescinded or start date for a job delayed due to COVID-19.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

While not everyone is eligible under this provision, it can provide those who are affected by the coronavirus options for their financial stability. If this applies to you and you choose to use this resource, make sure to keep thorough records of your qualifications and document your distribution. If you don’t recontribute within the three-year period, you’ll owe taxes on the distribution, even though you won’t have to pay the 10% early withdrawal penalty if you’re under 59½. 

As with any new IRS provision, other rules and restrictions may apply. Contact Smolin-Lupin today if you have questions or need assistance with considering your options.