The CARES Act Relief for Retirement Accounts

The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) was implemented in March of 2020 in an effort to provide financial assistance for workers, families, and businesses affected by the COVID-19 pandemic.

In addition to the Paycheck Protection Program (PPP) and Economic Impact Payments (EIP), the U.S. Department of the Treasury has implemented multiple, temporary changes aimed to aid the American people during financially trying times. From medical expenses and foreclosure to home or auto repair, millions found themselves in dire need of extra assistance — and the CARES Act sought to provide that relief.

One of these moves specifically impacts those with traditional Individual Retirement Accounts (IRAs) and 401(k)s. The primary form of relief is the ability to withdraw from your retirement account free of certain penalties that would normally apply — particularly the 10 percent early withdrawal penalty applied if you are under the age of 59 1/2.

Let’s dive into how some of these changes might affect your next tax return (and potentially your next few years).

Retirement provisions and eligibility under the CARES Act

The majority of changes afforded by the CARES Act — as it pertains to early access to retirement funds — are fairly straightforward. According to the IRS, you qualify for certain advantages if:

You are diagnosed with coronavirus disease 2019 (COVID-19) by a test approved by the Centers for Disease Control and Prevention; Your spouse or dependent is diagnosed with COVID-19 by a test approved by the Centers for Disease Control and Prevention; You experience adverse financial consequences as a result of being quarantined, being furloughed or laid off, or having work hours reduced due to COVID-19; You experience adverse financial consequences as a result of being unable to work due to lack of child care due to COVID-19; or You experience adverse financial consequences as a result of closing or reducing hours of a business that you own or operate due to COVID-19.

Those who qualify for a coronavirus-related distribution (CRD) may wonder what exactly that means for their financial situation. A CRD is simply a distribution made from an eligible retirement plan to an individual deemed as “qualified” based on the criteria listed above. The dates between which these distributions must be made are January 1, 2020, and December 30, 2020 — up to a total limit of $100,000 from all retirement accounts.

Am I required to pay the additional 10% tax on a CRD from my retirement account?

This is a common question. The answer is no — there is no applicable 10% additional tax on early distributions to coronavirus-related distributions.

When should I pay taxes on CRDs?

Beginning in the year in which you receive your CRD, you generally have a three-year period in which to pay taxes on the amount distributed. For example, if you were to receive a $6,000 coronavirus-related distribution in 2020, only one third of that amount will be taxable on your federal income tax return ($2,000) each year — 2020, 2021, and 2022.

If you prefer to report the entire amount in one year, however, you would do so in the year you received the funds.

What if I want to repay my coronavirus-related distribution to my retirement plan?

Depending on your financial situation, you may find that you’d rather pay

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