CARE Act: New Rules for Retirement Withdrawals

Bradford Tax Institute

April 2020

COVID-19: CARES Act Allows

$100,000 Tax-Free IRA Grab and Repay


More Relief: Retirement Account Required Minimum

Distribution Rules Suspended for 2020


The $2 trillion COVID-19 economic recovery bill finally

made it through Congress and was signed into law by

President Donald Trump on March 27.


The legislation is titled the Coronavirus Aid, Relief, and

Economic Security Act (CARES Act). It’s a daunting

880 pages long, but it contains good news for individuals

and businesses, including meaningful tax relief.


This article explains two tax relief measures that can

potentially benefit IRA and retirement account owners.


Here goes.


COVID-19-Related Distributions from IRAs

Get Tax-Favored Treatment


If you are an IRA owner who has been adversely affected

by the COVID-19 pandemic, you are probably

eligible to take tax-favored distributions from your IRA(s).


For brevity, let’s call these allowable COVID-19 distributions

“CVDs.” They can add up to as much as

$100,000. Eligible individuals can recontribute (repay) CVD

amounts back into an IRA within three years of the

withdrawal date and can treat the withdrawals and later

recontributions as federal-income-tax-free IRA rollover



In effect, the CVD privilege allows you to borrow up to

$100,000 from your IRA(s) and recontribute the amount

(s) at any time up to three years later with no federal

income tax consequences.


There are no income limits on the CVD privilege, and

there are no restrictions on how you can use CVD

money during the three-year recontribution period.


If you’re cash-strapped, use the money to pay bills and

recontribute later when your financial situation has

improved. Help your adult kids out. Pay down your HELOC.


Do whatever you want with the money.


CVD Basics


Eligible individuals can take one or more CVDs up to the

$100,000 aggregate limit, and these can come from

one or several IRAs. The three-year recontribution period

for each CVD begins on the day after you receive it.


You can make recontributions in a lump sum or make

multiple recontributions. You can recontribute to one or

several IRAs, and they don’t have to be the same account(s)

you took the CVD(s) from in the first place.


As long as you recontribute the entire CVD amount within

the three-year window, the transactions are treated

as tax-free IRA rollovers. If you’re under age 59 1/2, the

dreaded 10 percent penalty tax that usually applies to

early IRA withdrawals does not apply to CVDs.2


If your spouse owns one or more IRAs in his or her own

name, your spouse is apparently eligible for the same

CVD privilege if he or she qualifies (see below).


Do I Qualify for the CVD Privilege?


That’s a good question. Some IRA owners will clearly qualify,

while others may have to wait for IRS guidance.

For now, here’s what the CARES Act says.3


A COVID-19-related distribution is a distribution of up to

$100,000 from an eligible retirement plan, including

an IRA, that is made on or after January 2, 2020, and

before December 31, 2020, to an individual


  • who is diagnosed with COVID-19 by a test approved

by the Centers for Disease Control and Prevention; or


  • whose spouse or dependent (generally a qualifying

child or relative who receives more than half

of his or her support from you) is diagnosed with

COVID-19 by such a test; or


  • who experiences adverse financial consequences as a

result of being quarantined, furloughed, laid off, or forced

to reduce work hours due to COVID-19; or who is unable

to work because of a lack of child care due to COVID-19

and experiences adverse financial consequences as a

result; or


  • who owns or operates a business that has closed or had

operating hours reduced due to COVID-19, and


  • who has experienced adverse financial consequences as a

result; or


  • who has experienced adverse financial consequences

due to other COVID-19-related factors to be specified

in future IRS guidance.


  • We await IRS guidance on how to interpret the last two

factors. We hope and trust that the guidance will be

liberally skewed in favor of IRA owners. We shall see.

What If I Don’t Recontribute a CVD within the

Three-Year Window?


Another good question. You will owe income tax on the

CVD amount that you don’t recontribute within the

three-year window, but you don’t have to worry about owing

the 10 percent early withdrawal penalty tax if youare under

age 59 1/2.


If you don’t repay, you can choose to spread the taxable

amount equally over three years, apparently starting

with 2020.4


Example. Tomorrow you withdraw $90,000 from your

IRA, and you don’t recontribute it and don’t elect out of

the three-year spread; you have $30,000 of taxable income

in years 1, 2, and 3.


Here it gets tricky, because the three-year recontribution

window won’t close until sometime in 2023. Until

then, it won’t be clear that you failed to take advantage

of the tax-free CVD rollover deal.


So, you may have to amend a prior-year tax return to

report some additional taxable income from the three

year spread. The language in the CARES Act does not

address this issue, so the IRS will have to weigh in. Of

course, the IRS may not be in a big hurry to issue guidance

right now, because it has three years to mull it over.

You also have the option of simply electing to report the

taxable income from the CVD on your 2020 Form

  1. You won’t owe the 10 percent early withdrawal

penalty tax if you are under age 59 1/2.5


Can the One-IRA-Rollover-Per-Year

Limitation Prevent Me from Taking

Advantage of the CVD Deal?


Gee, you ask a lot of good questions. The answer is no,

because when you recontribute CVD money within

the three-year window, it is deemed to be done via a direct

trustee-to-trustee transfer that is exempt from the

one-IRA-rollover-per-year rule. So, no worries there.6


Can I Take a CVD from My Company’s

Tax-Favored Retirement Plan?


Yes, if your company allows it. The tax rules are similar

to those that apply to CVDs taken from IRAs.7


That said, employers and the IRS have lots of work to

do to figure out the details for CVDs taken from

employer-sponsored qualified retirement plans. Stay

tuned for more information.


More Good News: Retirement Account

Required Minimum Distribution Rules

Are Suspended for 2020


In normal times, after reaching the magic age, you must

start taking annual required minimum distributions

(RMDs) from traditional IRAs set up in your name

(including SEP-IRA and SIMPLE-IRA accounts) and

From tax-favored company retirement plan accounts.

The magic age is 70 1/2 if you attained that age before

2020 or 72 if you attain age 70 1/2 after 2019.8


And you must pay income tax on the taxable portion of

your RMDs. Ugh!9 Thankfully, the CARES Act suspends

all RMDs that you would otherwise have to take in 2020.


The suspension applies equally to your initial RMD if

you turned 70 1/2 last year and did not take that initial

RMD last year (the initial RMD is actually for calendar

year 2019). Before the CARES Act, the deadline for

taking that initial RMD was April 1, 2020. Now, thanks

to the CARES Act, you can put off any and all RMDs

that you otherwise would have had to take this year. Good!


For 2021 and beyond, the RMD rules will be applied

as if 2020 never happened. In other words, all the RMD

deadlines will be pushed back by one year, and any

deadlines that otherwise would have applied for 2020 will

simply be ignored.10




The CVD privilege can be a very helpful and very flexible

tax-favored financial arrangement for eligible IRA


  • You can get needed cash into your hands right

now without incurring the early withdrawal



  • You can then recontribute the CVD amount

anytime within the three-year window that will close

sometime in 2023—depending on the date you

take the CVD—to avoid any federal income tax hit.


The suspension of RMDs for this year helps your 2020

tax situation, because you avoid the tax hit on RMDs


COVID-19: CARES Act Allows $100,000 Tax-Free IRA Grab

and Repay at you otherwise would have had to withdraw this year.


1 CARES Act, Sections 2202(a)(2) through 2202(a)(5).

2 Basically, the CVD withdrawal and recontribution rules are the same as for IRA

withdrawals and subsequent rollovers, under IRC Section 408(d)(3), except

you get three years to put CVD money back into your IRA to avoid triggering

a tax bill—instead of the 60-day recontribution window that applies under the

regular IRA rollover rules. See Sections 2204(a)(3)(A) and 2204(a)(3)(C) of

the CARES Act. The 10 percent early withdrawal penalty tax is   imposed by IRC

Section 72(t), but Section 2202(a)(1) of the CARES Act exempts CVDs

from the 10 percent penalty tax.

3 CARES Act, Section 2202(a)(4)(A).

4 CARES Act, Section 2202(a)(5)(A).

5 CARES Act, Sections 2202(a)(1); 2202(a)(5)(A).

6 CARES Act, Section 2202(a)(3)(C); IRS Announcements 2014-15; 2014-32.

7 CARES Act, Sections 2202(a(3)(A); 2202(a)(3)(B).

8 IRC Section 401(a)(9).

9 If you don’t take at least the RMD amount for the year, you can get slammed with

a 50 percent penalty tax on the shortfall, under IRC Section 4973.

10 CARES Act, Section 2203.