This year has been a challenging year financially for many Americans. With business es closing, layoffs soaring, and many pay cuts implemented, if you weren’t impacted you almost certainly know someone who was. It seems like a century ago, but to address some of these struggles Congress passed the CARES Act in late March to provide some much needed assistance to struggling families and businesses. There is still a chance for Congress to pass additional support before the end of the year, but as the days go by without any progress, this is appearing less and less likely.

At this point the CARES Act may feel like old news, but there are still some benefits you may be able to take advantage of if you are struggling to make ends meet . One of the big benefits was the potential to take penalty-free distributions from certain retirement accounts. But this benefit is currently only available until year end. Here’s what you should know about c oronavirus distributions and whether you should consider taking one.

What are coronavirus distributions?

Generally speaking, retirement accounts are saved for . . .well, retirement. If you take money out of these accounts prior to congress’ arbitrarily determined age of 59.5 (or 55 for some retirement plans) not only do you owe taxes on the distribution, but you’re also assessed a 10% penalty on top of that. The penalty is there as a deterrent to keep people from withdrawing money from their retirement accounts too early and encourage continued savings for their golden years. Although the penalty usually applies if money is withdrawn too soon, the IRS also provides a list of exceptions to this . One of these exceptions, but only through the end of 2020, are coronavirus related distributions.

To qualify for this exception, you need to be impacted by the coronavirus. This includes:

• Being quarantined, furloughed, laid off, or having your work hours reduced

• Unable to work due to lack of childcare

• A business owner who has had to close, or reduce their hours

If you meet one of these criteria you are able to take up to $100,000 from an eligible retirement account as a coronavirus related distribution and qualify for an exception from the 10% penalty. Of course, if you’re already over age 59.5 the penalty no longer applies, and you do not need to worry about qualifying for an exception.

How can you access the money?

The easiest way to access the funds is by pulling them from an Individual Retirement Account (IRA). These funds are in your control and you can normally access them at any time. It’s as simple as linking your bank and contacting your investment provider , either online or over the phone , to request a distribution.

However, if your funds are tied up in a 401k it can be a little trickier. Some 401k plans don’t allow distributions until a certain age, or if you cease being employed by the company. If the plan doesn’t allow for distributions, unfortunately you may be stuck and cannot access the money for a distribution. The best way to determine whether you are able to take a distribution is simply contacting your plan provider and asking them. Some plans implemented new rules to allow these distributions to help employees who are struggling during this time, so it doesn’t hurt to ask.

If you are no longer working for the company, and they are unable to distribute the money through other means, another option is to rollover your old 401k to an IRA. Calling and asking to do a ” direct rollover ” to an IRA is not a taxable event. You can move your entire retirement plan to an IRA, and once there, can only take out what you need, up to $100,000 , to qualify for a coronavirus related distribution. Something to keep in mind though is that it does take some time for the investment provider to process a direct rollover. So, if this is something you would like to do before year end it’s better to process it sooner rather than later.

What are the tax implications?

When it comes to these special distributions, the tax planning aspects go beyond just avoiding the 10% penalty. First, even though the penalty is avoided, the distribution is still taxable. Taking a full, or even partial, coronavirus related distribution can put you into a higher tax bracket, or phase you out of certain tax deductions if you’re not monitoring your tax situation. Luckily, these distributions allow for some additional special tax treatment that may alleviate some of this issue.

One additional benefit to these distributions is that they allow you to spread out the taxable income from the distribution over the next 3 years. As an example, if you took $90,000 as a distribution, you could elect to have it spread out evenly as $30,000 taxable in 2020, $30,000 in 2021, and $30,000 in 2022. This can lessen the tax burden this year, and spread it out over the next few years, even though the entire amount is taken in 2020.

Another big benefit to these distributions is that the amount withdrawn can be paid back anytime over the next 3 years, either partially or in full. If your financial situation improves you can replenish what was taken out and eliminate the tax impact. But it’s important to make sure to amend your tax return if you don’t return the money in 2020. If you take the money in 2020, and return it in 2022, your 2020 return will still show the extra income from the distribution even though it was returned! You need to go back and amend your 2020 return and remove the distribution that was taken in order to actually see your taxes reduced. Amending the return will result in a tax refund of the amount of taxes paid for the distribution. If the income is spread over multiple years, you’ll need to amend each years’ return separately.

There are many tax planning considerations when it comes to these special IRA distributions. For instance, even though you can spread out the distribution over 3 years , depending on your current tax situation, and future expected one, it may make sense to report it all this year if you’ll likely be in a lower tax bracket. Also, making sure the distribution is reported correctly, along with any return of the money, is crucial to avoiding any unexpected penalty or getting back any owed tax refund. Working with a qualified tax p reparer or financial advisor is recommended to make sure everything is reported correctly.

Don’t forget about investments!

We talked a lot about the tax planning implications of a distribution, but there are also investment considerations. A big issue with taking money out of a retirement account for a distribution is that it is no longer invested and working for your future. The issue can be two-fold . First, you’re taking money out of your account, so you have less money invested for your future to begin with. Second, even if you put the money back later, you could be taking money out at a “low” today, only to put it back and reinvest it later at a higher amount. Of course, we don’t know what the stock market will do between now and when you return the money, but there is certainly a risk in taking money out now .

Summary

You only have until December 31, 2020 to make a coronavirus distribution. Just because you can take money out penalty free doesn’t necessarily mean you should. Each individual situation is going to be different. Your personal tax planning and financial situation will determine whether it makes sense for you , if you qualify for a distribution. There are many aspects to consider when it comes to coronavirus distributions, and at this point, there isn’t much time left to take advantage of them. If you need assistance with your tax planning or financial plan, please reach out to one of our financial advisors for assistance .