Tax Relief for Coronavirus Related Distributions

Tax Relief for Coronavirus Related Distributions

November 18, 2020

To put it lightly, 2020 has been rough. While there is hope in the way of a vaccine around the corner, unemployment is still high, and the economy is still suppressed.  Some people are finding themselves in a financial bind. Fortunately, as part of the Cares Act passed earlier this year, impacted individuals who take distributions from their retirement accounts won’t have as high a tax cost as normal. Here’s how it works and who should consider taking advantage of this rule.

What are Coronavirus Related Distributions?

Sometimes when we write about financial topics, we have to get a bit technical. This is one of those times...

Hopefully, most know that if you take a distribution from a traditional retirement account, the money you take is treated as income and taxed at your ordinary income tax rates. If you are under 59 ½, there is also a 10% early withdrawal penalty on normal distributions that do not qualify for special exemptions. The combination of income taxes and the 10% early withdrawal penalty makes retirement accounts a pretty expensive source of money.  

The Cares Act changes some of the rules for what they call Coronavirus Related Distributions.  It allows impacted individuals to take up to an aggregate of $100,000 between January 1, 2020 and December 30, 2020 from qualified retirement accounts with less of a tax consequence than normal. First off, the 10% penalty will not apply to these distributions, regardless of your age. Second, you have the option of spreading the income from the distribution over a 3-year period of time. Finally, you can repay the distribution into the account at any time over the three years and recoup any taxes paid through amendments to your returns.    

Who Qualifies:

The IRS has set out a group of rules for who qualifies. They are pretty broad, but you will want to check with your tax advisor to make sure you actually qualify. Directly from the IRS site:

You are a qualified individual if –

  • You are diagnosed with the virus SARS-CoV-2 or 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 SARS-CoV-2 or 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 SARS-CoV-2 or COVID-19;
  • You experience adverse financial consequences as a result of being unable to work due to lack of child care due to SARS-CoV-2 or 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 SARS-CoV-2 or COVID-19.

Who should take advantage of these rules?

If you are in a situation where the only option to make ends meet is to take a retirement distribution, then absolutely consider doing so. These changes intend to help out in just that situation.  

While it may look attractive to take a distribution, I encourage you not to if you don’t need it. Retirement accounts typically get cheaper from a tax perspective in retirement anyway. The 10% early withdrawal no longer applies when you are over 59 ½. Your income is typically lower, resulting in a lower tax bracket. Any money that comes out of the account is no longer invested, potentially costing you exponential growth for the future.  

The Coronavirus Related Distribution changes are a nice form of help for those who need it. For the rest, though, it’s a red-herring. Sounds good, but in the long run, it isn’t.  We believe you will be better off sticking to your longer-term retirement savings strategy.  

If you need any help interpreting these rules and what you should do, shoot us an e-mail at 

This material is provided as a courtesy and for educational purposes only. Please consult your investment professional, legal or tax advisor for specific information pertaining to your situation.