What qualifies as a “coronavirus-related distribution” from a retirement plan?

coronavirus-related distribution

As you may have heard, the Coronavirus Aid, Relief and Economic Security (CARES) Act allows “qualified” people to take certain “coronavirus-related distributions” from their retirement plans without paying tax.

So how do you qualify? In other words, what’s a coronavirus-related distribution?

Early distribution basics

In general, if you withdraw money from an IRA or eligible retirement plan before you reach age 59½, you must pay a 10 percent early withdrawal tax. This is in addition to any tax you may owe on the income from the withdrawal. There are several exceptions to the general rule. For example, you don’t owe the additional 10 percent tax if you become totally and permanently disabled or if you use the money to pay qualified higher education costs or medical expenses.

New exception

Under the CARES Act, you can take up to $100,000 in coronavirus-related distributions made from an eligible retirement plan between January 1 and December 30, 2020. These coronavirus-related distributions aren’t subject to the 10 percent additional tax that otherwise generally applies to distributions made before you reach age 59½.

What’s more, a coronavirus-related distribution can be included in income in installments over a three-year period, and you have three years to repay it to an IRA or plan. If you recontribute the distribution back into your IRA or plan within three years of the withdrawal date, you can treat the withdrawal and later recontribution as a totally tax-free rollover.

In new guidance (Notice 2020-50) the IRS explains who qualifies to take a coronavirus-related distribution. 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

As you can see, the rules allow many people — but not everyone — to take retirement plan distributions under the new exception. If you decide to take advantage of it, be sure to keep good records to show that you qualify. Be careful: You’ll be taxed on the coronavirus-related distribution amount that you don’t recontribute within the three-year window. But you won’t have to worry about owing the 10 percent early withdrawal penalty if you’re under 59½. Other rules and restrictions apply. Contact us if you have questions or need assistance.

About the author

Brady is the owner of Ramsay & Associates. He specializes in financial statement preparation and personal, fiduciary and corporate tax and accounting.

His professional experience includes seven years' experience for local and national CPA firms before joining Ramsay & Associates in 2006.

He has a Bachelor of Accounting degree from the University of Minnesota Duluth. He is a Certified Public Accountant, a member of the Minnesota Society of CPA's, an Eagle Scout, as well as an active volunteer in the community.

3 Keys to Mid-Year Retirement Planning Checkup

Retirement Planning, Retirement Savings Checkup, Retirement Plan, Ramsay CPA, Mahtomedi, MNWith Q2 firmly in the rearview and Q3 of the 2016 calendar year off to a strong start, now is the perfect time to review your retirement savings goals and opportunities.

From contributions to spending and net worth, give your retirement investments a mid-year checkup to make sure your retirement plans are still on track. Here are three keys to any checkup worth its salt.

1. Adjust Your Annual Contributions.

Whether you contribute to a 401(k) or to Roth IRAs, you still have time to fine-tune your annual contributions to maximize your retirement savings. If you don’t already belong to your employer’s retirement plan, join as soon as you can. If the plan allows for contributions, review your contribution amount to take advantage of the opportunity to save for your retirement.

The maximum annual salary deferral contributions allowed for 2016 are $18,000 to 401(k) or 403(b) plans and $12,500 to SIMPLE plans. If you are 50 or older by the end of the year, your plan may allow you to make additional catch-up contributions of $6,000 to 401(k) or 403(b) plans and $3,000 to SIMPLE plans.

If an employer’s retirement plan is not an option, you can still contribute toward your retirement via a traditional or Roth IRA. For 2016, you can contribute a maximum of $5,500 ($6,500 if you are 50 or older) or your taxable compensation for the year, whichever is less.

2. Rebalance Your Net Worth.

From Brexit to the immanent presidential election, this year’s events have resulted in a volatile stock market. If you are near retirement and see a big fluctuation in your net worth in 2016, perhaps you have too much invested in stocks. While the bull has stampeded throughout the US stock market in recent months, an unstable economic climate could quickly curtail the bear’s hibernation.

3. Stick to Your Spending Budget.

Many of us overspend during the holiday season, resolve to be more frugal in the new year and successfully adhere to a stricter budget for the first several months. However, much like diet and exercise resolutions, summertime can throw a wrench in our plans and reset the cycle. Mid-year is a good time to check your budget and see if you are spending too much money. Consider increasing the salary deduction percentage if you aren’t maxed out on your 401(k) contributions yet. Less cash in the bank might take a little getting used to but it will help you achieve your budgetary goals.

Confused about which retirement plan is right for you? Ramsay & Associates can analyze your needs and help you understand which plan makes the most sense for your financial circumstances. Contact us today to learn more!

About the author

Brady is the owner of Ramsay & Associates. He specializes in financial statement preparation and personal, fiduciary and corporate tax and accounting.

His professional experience includes seven years' experience for local and national CPA firms before joining Ramsay & Associates in 2006.

He has a Bachelor of Accounting degree from the University of Minnesota Duluth. He is a Certified Public Accountant, a member of the Minnesota Society of CPA's, an Eagle Scout, as well as an active volunteer in the community.