CARES Act eases rules on retirement account withdrawals


Contributed by
Justin Smith, CPA

You may be able to withdraw up to $100,000 from your Individual Retirement Account (IRA) or your 401(k) and avoid the traditional 10% early withdrawal penalty if you act by Dec. 30.

Prior to the passage of the 2020 Coronavirus Aid, Relief, and Economic Security Act, taxpayers generally under 59 ½ years old who take early distributions from a retirement account were required to pay income tax on the withdrawal, plus an additional 10% if they did not meet certain exceptions. The purpose of the early withdrawal penalty is to encourage workers to leave their money in their retirement accounts and protect their future.

Under the CARES Act, you may now make up to a $100,000 withdrawal while avoiding the 10% early withdrawal penalty. Further, the law allows you to elect to spread the income tax on the withdrawal over a three-year period (tax years 2020 – 2022) rather than paying it all when filing your 2020 tax return. The law currently only permits such withdrawals through the end of 2020, so the window of opportunity is quickly closing.

Better still, you can repay all or part of the distribution within three years in order to avoid paying income tax on that amount. If you have already paid taxes on the withdrawal and subsequently pay back the distribution, you can file amended tax returns to obtain a refund of the tax.

All of this adds up to an excellent, albeit limited, opportunity to tap into your retirement savings if you need an immediate source of cash related to the COVID-19 pandemic to make ends meet.

Now that you know the basics of the tax implications, it is also important to understand that distributions under the CARES Act must be related to COVID-19. Specifically, qualified distributions are for those individuals who meet one of the following conditions:

•  Were diagnosed with COVID-19 during 2020

•  Had a spouse or dependent diagnosed during 2020

•  Experienced adverse financial consequences such as being furloughed, laid off, or had work hours reduced

•  Experienced adverse financial conditions because of the inability to locate child care, or had to close or substantially reduce a self-employed business

Not all individuals will qualify, but almost everyone needing a retirement withdrawal probably meets at least one of the criteria listed above.

The legislation also provides relief for taxpayers who have outstanding loans on their retirement accounts. It is also permissible to take a loan against a retirement account that is not classified as a distribution.

Taxpayers should carefully consider whether making an early withdrawal is the right option for them. While it may make sense to take a distribution to cover urgent needs such as mortgage or rent payments, medical bills or other critical items, you are also taking money from your future self that may delay your ability to retire comfortably.

While you only have a short time remaining to make your distribution, you should also consult with a trusted financial advisor to ensure you are making the best decision for yourself.

Justin Smith is a licensed Certified Public Accountant in Opelika, specializing in individual and small business tax and accounting. He can be contacted at 334-400-9234 or His Web site is


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