Article written by:
Jennifer Zimmerman, CPA
Senior Manager, Tax & Business Advisory Services
Staff, Tax & Business Advisory Services
The Coronavirus Aid, Relief, and Economic Security (CARES) Act, passed on March 27th, includes provisions to assist taxpayers with expanded access to retirement funds and waives required minimum distributions (RMD) in 2020. Below we look at these factors in greater detail.
Expanded Access to Retirement Funds
IRAs and other retirement plans impose a penalty tax of an additional 10% if funds are distributed without a qualifying reason before the age of 59½. Under the CARES Act, distributions from eligible retirement plans related to Coronavirus will not be subject to this 10% tax in 2020. This applies to any individual who falls under any of the following conditions:
- The plan member (or spouse or dependents) has been diagnosed with COVID-19 by a CDC-approved test;
- The plan member is experiencing financial hardship because of quarantine or other factors;
- The plan member is unable to work due to COVID-19 child care issues; or
- The plan member has reduced hours in employment.
Distributions related to Coronavirus may not exceed $100,000 for any taxable year. To ease the tax burden for the distributions, taxpayers may elect to spread the income ratably over a 3-year period beginning with tax year 2020.
Alternately, taxpayers may opt to recontribute the funds within three years of the day after the distribution was received. These repayments would be treated as a tax-free rollover.
Additional guidance is still needed on how these distributions will be reported, as the rules do not indicate what would happen if you intended to recontribute the funds and later decide to keep them. For those meeting this criteria, this provision could provide benefits beyond the initial access to cash and should be considered as part of a larger overall tax/financial plan. Be sure to discuss your options with your tax and financial advisors if you are considering pulling from your retirement account.
Waiver of Required Minimum Distributions for 2020
Required minimum distributions (RMD) are required once you have reached the age of 72 (70½ before 2020) for IRAs and certain defined contribution plans, and are typically calculated based on prior year metrics. The CARES Act waived RMDs for the calendar year 2020. If you have already taken these distributions, you can reinvest them tax-free back into your IRA within 60 days of receipt of the RMD. It is not yet known if additional relief will be offered to those who are already outside the 60-day rollover window. Additional guidance is anticipated.
Everyone’s tax situation is different. Looking at your entire tax picture is a critical piece of weighing these additional options. If you have questions on how the CARES Act impacts your personal tax situation, GBQ is here to help.