Special Rules for Use of Retirement Funds

May 14, 2020

Special Rules for Use of Retirement Funds

By Lorri Morris

The Coronavirus Aid, Relief and Economic Security Act (CARES Act) is a federal stimulus to help support the U.S. economy while the country is in lockdown due to the COVID-19 pandemic. The U.S. stock market has fallen significantly as a result of the pandemic, thereby reducing the value of retirement accounts.

The CARES Act includes several provisions that cover retirement accounts and changes that will impact retirement income strategies. Usually, the tax law restricts access to retirement funds for nonretirement purposes. However, due to these unprecedented circumstances, the CARES Act has waived certain penalties for coronavirus-related distributions from retirement accounts, including IRA and 401(k) distributions.

A taxpayer can withdraw up to $100,000 from qualified retirement accounts for coronavirus-related distributions made on or after January 1, 2020 and before December 31, 2020 without incurring the 10% early withdrawal penalty. In addition, the new law allows taxpayers to repay such distributions over a three-year period beginning on the day after the date the distribution was taken, but you may choose to pay it all at once. If the distribution is not repaid to the plan, it must be included in gross over a three-year period beginning with the year the distribution was taken.

A coronavirus-related distribution is defined as a distribution made to:

  • an individual who is diagnosed with COVID-19 by a Centers for Disease Control and Prevention (CDC) approved test;
  • an individual whose spouse or dependent is diagnosed with COVID-19 by such a test; and
  • an individual who experiences adverse financial consequences as a result of:
  1. being quarantined, furloughed, laid off or due to a reduction in work hours;
  2. the inability to work due to lack of child care or;
  3. the inability to work due to the closing or reduction in hours of a business owned or operated by the individual.

The CARES Act temporarily waives the required minimum distribution rules for calendar year 2020. This provision only applies to required minimum distributions from an individual retirement plan and certain defined contribution plans. Usually, loans from employer plans were limited to $50,000 or if lower, 50% of the vested account balance. The CARES Act increases that amount to $100,000 or if lower, 100% of the account balance. These expanded limits only apply to loans made from March 27 to September 23, 2020. Typically, loans are repaid over a five-year period through payroll deductions, but the CARES Act provides an extra year to repay the loans, thereby creating a six-year repayment period. This waiver can be a great way for individuals to lower their 2020 adjusted gross income and allows an additional year of deferred tax savings.

If you recontribute funds, you will not be limited to IRS rules limiting annual contributions because your repayment or repayments will be treated like a rollover, which are not subject to the rules limiting plan contributions.


Given the extensive changes, details and potential complexities of the CARES Act, you should contact your tax advisor and learn how your taxes and retirement accounts might be affected. With their guidance, you can decide how much to withdraw, whether to take a loan instead of a withdrawal, whether the ratable tax payment for three years opens up any opportunities, or whether you may withdraw funds now with the intention of repaying them over three years. You also will need to determine whether to delay the repayment of a loan. In addition, you should receive advice on the state income tax burden you may have if funds are withdrawn.

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