Using Coronavirus-Related Distributions To Reduce The Tax Impact Of Distributions From Retirement Accounts

On March 27, 2020, the Coronavirus Aid, Recovery, and Economic Security (CARES) Act was signed into law by President Donald Trump. The law provides significant financial relief for those impacted by the ongoing COVID-19 crisis, from forgivable loans for small businesses to significantly enhanced unemployment benefits.

The CARES Act also offers retirement account owners relief in a variety of ways, including the introduction of a new, special type of distribution, known as a Coronavirus-Related Distribution. Such distributions offer several benefits, including being exempt from the 10% early distribution penalty, allowing the income from the distribution to be spread over three years, and enabling the distribution to be rolled over for up to three years!

What Are Coronavirus-Related Distributions?

Coronavirus-Related Distributions are distributions up to $100,000, taken in 2020, that can be made from an account owner’s retirement accounts by a qualifying individual (discussed below) who has been impacted by the coronavirus. The IRS recently provided this FAQ page addressing coronavirus-related relief for retirement plans and IRAs, which summarizes the key Coronavirus-Related Distribution provisions.

Coronavirus-Related Distributions Are Limited To A Maximum Of $100,000

Section 2202(a)(2)(A) of the CARES Act limits the total amount of an individual’s retirement account distributions that may be treated as a Coronavirus-Related Distribution to no more than $100,000.

The $100,000 limit is a coordinated limit between all an individual’s IRAs and employer-sponsored retirement account, combined. Thus, if an individual has already taken $75,000 as a Coronavirus-Related Distribution from an employer plan, they may take only another $25,000 from an IRA, and have it treated as a Coronavirus-Related Distribution.

Coronavirus-Related Distributions Must Be Taken In 2020

The CARES Act requires that a Coronavirus-Related Distribution be taken in 2020. Notably, it allows for such distributions to be taken any time in 2020, even as far back as January 1^st!

In doing so, it is one of the few provisions in the CARES Act that provides relief to individuals for acts that occurred at the very beginning of the year, before there were any positive cases of the coronavirus identified in the United States, and well before any of the financial effects of social distancing, quarantine and lockdown were felt.

Qualifying For A Coronavirus-Related Distribution

There are a number of reasons an individual might want to take a Coronavirus-Related Distribution. Such distributions, however, are not universally available and are subject to a variety of limitations.

More specifically, Coronavirus-Related Distributions may only be taken by those individuals who have been affected by the coronavirus. In addition, if the desired distribution is to come from an employer-sponsored retirement plan, an individual must have access to those dollars.

Coronavirus-Related Distributions May Only Be Taken By Those Impacted By The Virus

In order to treat a distribution as a Coronavirus-Related Distribution, an individual must be impacted by the coronavirus in one or more ways specified by the CARES Act. Specifically, the CARES Act provides relief via Coronavirus-Related Distributions for individuals who have experienced health and/or financial impacts as a result of the virus.

Any individual diagnosed with COVID-19 by a test approved by the Centers for Disease Control and Prevention can qualify to take a Coronavirus-Related Distribution. The same also applies to any individual whose spouse or dependent (as defined in IRC Section 152, which includes both qualifying children and qualifying relatives) is similarly diagnosed.

In addition, the CARES Act also allows Coronavirus-Related Distributions to be taken by individuals who are experiencing adverse financial consequences due to the coronavirus as a result of being:

• Quarantined, furloughed, laid off, or having work hours reduced; or
• Unable to work due to lack of childcare; or
• A business owner who has had to close or reduce the hours of their business.

In addition, the CARES Act also allows the Secretary of the Treasury (read “the IRS”) to determine additional factors. To date, the Treasury has not provided any additional factors for qualification. However, in the FAQs released on May 4, 2020, the IRS did note that “The Treasury Department and the IRS have received and are reviewing comments from the public requesting that the list of factors be expanded.” So, relief for additional individuals may be coming soon.

Individuals Must Have The Ability To Access Their Retirement Dollars

A final requirement for an individual to be able to take a Coronavirus-Related Distribution is to actually be able to access their retirement dollars to take a distribution in the first place!

In some cases, this requirement will be of minimal concern, whereas in other situations, it may create a significant roadblock. Notably, for those with employer-sponsored retirement plans, the ability to take a Coronavirus-Related Distribution can depend upon the type of plan offered by the employer, as well as the employer’s desire to make such distributions available.

IRAs. One of the benefits of IRAs is the ability to access one’s own money whenever they would like (at least from a tax perspective, as certain investment options may lock up retirement dollars for set periods of time, or subject investors to surrender charges). Thus, individuals with IRA accounts, who otherwise qualify for a Coronavirus-Related Distribution, will generally be able to take such distributions as desired.

Employer-Sponsored Defined Contribution Retirement Plans. For individuals with employer-sponsored defined contribution retirement plans, such as 401(k)s and 403(b)s, being able to take a Coronavirus-Related Distribution begins to get a little bit trickier. Simply put, depending on how their plan was set up by their employer, employees may or may not have access to their plan assets.

Employers, though, do not have the ability to control the tax treatment of plan distributions. Thus, if an individual is able to access plan funds, and they meet the other requirements for a Coronavirus-Related Distribution, they will be able to treat that distribution as a Coronavirus-Related Distribution.

To a large degree, however, employers do have control over whether an employee will have access to their plan assets. And that’s particularly true when it comes to access specifically for Coronavirus-Related Distributions.

Notably, former employees who have separated from service typically have access to the funds in any defined contribution plan sponsored by the employer from which they separated. As such, they will generally be able to take Coronavirus-Related Distributions when desired.

But current employees of the same company don’t always have the same access.

Absent the availability of one or more optional plan provisions, such as hardship distributions or in-service distributions, current employees don’t have access to plan funds. And an individual without access to their funds can’t take a distribution (including those that would be treated as a Coronavirus-Related Distribution!).

Example #1: Lorraine, age 60, is an employee of ABC Company and is a participant in the ABC 401(k) plan. Lorraine’s spouse was recently diagnosed with COVID-19, making her eligible for a Coronavirus-Related Distribution.

Unfortunately, the ABC 401(k) does not include a hardship distribution provision, nor does it allow for in-service distributions. Furthermore, ABC Company has declined to amend its plan to allow Coronavirus-Related Distributions to be treated as distributable events.

As such, Lorraine will be unable to take a Coronavirus-Related Distribution from the ABC Company 401(k) plan.

However, if a plan does allow for hardship or in-service distributions, employees may be allowed to take Coronavirus-Related Distributions if they meet the eligibility requirements in place by the plan to take distributions.

Example #2: Ellis, age 62, is an employee of PQR Company and is a participant in the PQR Company 401(k) plan. Ellis’s spouse was recently diagnosed with COVID-19 making him eligible for a Coronavirus-Related Distribution.

PQR has decided not to amend its plan to allow specifically for Coronavirus-Related Distributions. The PQR 401(k) plan does, however, have an existing provision allowing employees to take in-service distributions at or after age 59 ½. Thus, since Ellis is 62 and meets the eligibility requirements for an in-service distribution, he can use that provision to access his plan assets.

Furthermore, as a result of his spouse’s COVID-19 diagnosis, he may treat that distribution as a Coronavirus-Related Distribution (and, for instance, spread the income from the distribution evenly over 2020, 2021, and 2022).

For employers whose retirement plans do not allow for hardship or in-service distributions, but who want to make Coronavirus-Related Distributions available to their employees, there’s good news here as the CARES Act permits employers to amend their plans to allow Coronavirus-Related Distributions to be their own distributable event.

Thus, an employer who decides to adopt such a provision would permit plan participants to take a Coronavirus-Related Distribution regardless of their age and/or employment status (provided participants otherwise meet the requirements for such a distribution).

More specifically, Section 2202(a)(6)(B) the CARES Act states:

…a coronavirus-related distribution shall be treated as meeting the requirements of sections 401(k)(2)(B)(i), 403(b)(7)(A)(i), 403(b)(11), and 457(d)(1)(A) of such Code and section 8433(h)(1) of title 5…

Nerd Note: “Section 8433(h)(1) of title 5” covers the Federal Thrift Savings Plan.

Example #3: Alan, age 40, is an employee of XYZ Company and is a participant in the XYZ Company 401(k) plan. Alan’s spouse was recently diagnosed with COVID-19, making him eligible for a Coronavirus-Related Distribution.

The XYZ 401(k) does not have a hardship distribution, nor does it offer in-service distributions. However, in an effort to assist any of its employees struggling due to the pandemic, XYZ Company decides to adopt the provision allowing individuals otherwise eligible to receive a Coronavirus-Related Distribution to have a distributable event.

Thus, Alan will be able to access his 401(k) funds in order to take a Coronavirus-Related Distribution.

Employer-Sponsored Defined Benefit Retirement Plans. The ability to access funds in an employer-sponsored defined benefit retirement plan in order to take a Coronavirus-Related Distribution is even more limited than the ability to access employer-sponsored defined contribution plan funds for the same purpose.

Notably, the CARES Act does not allow such plans to be amended in order to create a special distributable event for a Coronavirus-Related Distribution. Thus, in order to take a Coronavirus-Related Distribution from an employer-sponsored defined benefit plan, an individual must be eligible to take a distribution from the plan for ‘normal’ reasons as well.

Although defined benefit plans cannot offer hardship withdrawals, in-service distributions from such plans may be allowed as early as a participant’s age 59 ½. However, that ability was created only months ago via the SECURE Act (down from age 62), and thus, many plans have not yet adopted such provisions.

Accordingly, employees younger than age 59 ½ are unable to take advantage of a Coronavirus-Related Distribution from their employer-sponsored defined benefit plans.

Reporting Of Coronavirus-Related Distributions

Advisors should be sure to let clients taking Coronavirus-Related Distributions know that there is no special reporting from custodians for such distributions. As such, individuals should expect to receive a standard Form 1099-R showing the gross amount of their distribution.

So how does the IRS know that an individual’s distribution is a Coronavirus-Related Distribution that is eligible to receive a variety of tax benefits? It’s all done on an individual’s income tax return.

More specifically, Form 8915 is used to report how much of a disaster distribution is includable in income each year (and will presumably be used to report Coronavirus-Related Distributions).

Furthermore, pre-59 ½ retirement accounts owners will use Form 5329, Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts, to report to IRS that the taxable portion of their Coronavirus-Related Distribution is exempt from the 10% early distribution penalty.

Benefits Of Coronavirus-Related Distributions

Coronavirus-Related Distributions may offer qualifying retirement account owners as many as five potential benefits compared to ‘normal’ distributions. Individuals may choose (or only need) to use only a single benefit offered by the provision, or they may choose (or need) to use as many as all five.

The five potential benefits are:

1. Exemption from the 10% Early Distribution Penalty;
2. Income from the distribution, while taken in 2020, can be reported over three years;
3. Repayments for any portion of the distribution can be made up to three years afterward;
4. No mandatory withholding on employer-sponsored retirement plan distributions; and
5. Enhanced access to funds held in employer-sponsored retirement plans.

Benefit #1: Exemption From The 10% Early Distribution Penalty

In general, distributions from IRAs and other pre-tax retirement accounts, made to individuals under the age of 59 ½ on the day of distribution, are subject to both income tax and a 10% Early Distribution Penalty.

Coronavirus-Related Distributions, though, are exempt from the 10% Early Distribution Penalty. Ordinary income tax on such distributions, however, will continue to be owed.

Benefit #2: Distribution Income May Be Spread Over Three Years

By default, the income from a Coronavirus-Related Distribution, all of which is taken in 2020, will be reported evenly over 2020, 2021, and 2022. This may help reduce the tax impact of any such distribution, and may also help with an individual’s cash flow needs, as while the entire Coronavirus-Related Distribution is received now in 2020, the tax liability due to a distribution can be paid over three years.

Example #4: Beth has recently been laid off by her employer. Although she qualifies for and receives the enhanced unemployment benefits provided by the CARES Act, she still needs additional cash flow to meet her family needs. As such, throughout 2020, Beth takes distributions from her IRA totaling $30,000.

Beth is unsure how long she will be out of work, and whether any new employer will pay her a salary comparable to the salary she had been receiving from her old employer prior to getting laid off. Cash flow, therefore, is Beth’s immediate concern.

Given this a set of facts, Beth should likely stick with the default method of Coronavirus-Related Distribution income inclusion and include the income ratably over the three-year period beginning in 2020 and ending in 2022.

Thus, she would have $10,000 of income included on each of her 2020, 2021, and 2022 Federal income tax returns.

Alternatively, an individual may elect out of the default three-year spread and elect to include all the income from a Coronavirus-Related Distribution on their 2020 Federal income tax return.

This option may be particularly attractive for those who are experiencing significantly-lower-than-normal income in 2020 (likely due, in some way, to the pandemic), but who expect to return to a more normal, higher-income level soon.

Example #5: Mitch is the owner of a popular local bar. Normally, Mitch has a profit of close to $200,000 each year. This year, as a result of the coronavirus crisis, Mitch’s business is running a loss, and at best, he hopes to squeak out a small profit by year-end.

Given the business’ current struggles, Mitch is short on cash to meet personal expenses and has to dip into his retirement savings via a Coronavirus-Related Distribution. Throughout 2020, he takes a total of $99,000 of distributions from his IRA.

By default, Mitch would include $33,000 of income on each of his 2020, 2021, and 2022 Federal income tax returns due to the Coronavirus-Related Distribution. Mitch is confident, however, that by early- to mid-2021, things will be back closer to normal, and he expects his income to return close to previous levels.

Therefore, 2020 represents what will be an unusually low-income year for Mitch. As a result, he should consider electing out of the default option for Coronavirus-Related Distribution income inclusion, and instead, including it all on his 2020 Federal income tax return.

Notably, individuals must choose either the default method of splitting income ratably over the three years beginning in 2020 or of including all of the income from their Coronavirus-Related Distribution on their 2020 Federal income tax return. They may not, however, mix and match between the two.

In other words, either all of the income from the Coronavirus-Related Distribution is spread evenly over the three-year period, or all of the income is included on the 2020 return.

Benefit #3: Coronavirus-Related Distributions May Be Repaid For Up To Three Years

A third significant benefit of a Coronavirus-Related Distribution is the ability to repay all, or any portion, of the distribution for up to three years. The three-year period during which repayment is allowed begins on the day after the Coronavirus-Related Distribution is received.

Such repayment may be achieved by rolling the distribution back into the same account from which it was distributed, or by rolling it into another eligible retirement account. Furthermore, the repayment may be accomplished via a single payment equal to the amount of the original distribution, or via multiple payments (not to exceed the amount of the original distribution).

Nerd Note: There is no requirement for an employer-sponsored retirement plan to accept rollovers into the plan, including rollovers of Coronavirus-Related Distributions taken from that plan. In situations where a plan does not accept rollovers into the plan, but repayment of a Coronavirus-Related Distribution is required, an individual may need to establish an IRA to complete the rollover (if there is no existing IRA or other plan accepting rollovers into the plan available).

Furthermore, Section 2202(a)(3)(B) provides, in part, that an individual completing a rollover of all or a portion of a Coronavirus-Related Distribution will be treated “as having transferred the amount to the eligible retirement plan in a direct trustee to trustee transfer within 60 days of the distribution” [emphasis added]. Thus, individuals who are repaying Coronavirus-Related Distributions received from IRA accounts need not be concerned about violating the once-per-year rollover rule (as the rule does not apply to direct trustee-to-trustee transfers).

In the event that a repayment of a Coronavirus-Related Distribution is made after one or more returns that included income from such a distribution have been filed, an amended return (or returns) will need to be filed in order to claim a refund of excess taxes paid. Thus, repayments of such distributions made in 2023 could require as many as three amended returns.

Example #6: In 2020, Clark took a Coronavirus-Related Distribution from his IRA of $90,000 and chose to use the default method of reporting that income. Thus, Clark was required to include $30,000 of income on his 2020, 2021, and 2022 Federal income tax returns.

In November 2022, after having filed both his 2020 and 2021 Federal income tax returns, Clark was able to repay his Coronavirus-Related Distribution by rolling $90,000 into an IRA. As such, Clark should file an amended 2020 and 2021 return, reducing his IRA income by $30,000 in each year.

Upon filing such returns, Clark would receive a refund based on the difference and the tax liability between the original and amended returns.

Notably, if an individual uses the default income inclusion option for a Coronavirus-Related Distribution and is later able to repay only a portion of the distribution, the repaid amount will reduce the income in each of the three years proportionally.

Example #7: On December 1, 2020, Irina took a $45,000 Coronavirus-Related Distribution from her IRA and chose to report the income using the default method of spreading the income evenly over 2020, 2021, and 2022. Thus, $15,000 of income is reported in each year.

By November 2023, after filing her 2020, 2021, and 2022 returns, and just before the end of her three-year repayment window, Irina managed to save $33,000. Accordingly, she rolled $33,000 into an IRA to reduce the income tax impact of her 2020 Coronavirus-Related Distribution.

The $33,000 rolled back into her IRA reduces her total Coronavirus-Related Distribution to $45,000 - $33,000 = $12,000. And since Irina used the default method of income inclusion, that $12,000 would be split evenly from 2020 – 2022.

Thus, Irina would amend her 2020, 2021, and 2022 returns to reduce her IRA income from $45,000 / 3 = $15,000 to $12,000 / 3 = $4,000 in order to claim a refund of overpayment of taxes for each year.

One question that has been asked with some regularity is, “If I plan to pay back my Coronavirus-Related Distribution before the end of the three-year repayment period, can I just avoid including the distribution in my income from the start? And then if for some reason I don’t actually pay it back before the three years, go back and amend my returns to include the income?”

Essentially, the idea here would be to avoid having to pay the IRS taxes with cash that might be needed (or could be invested) now, when those tax dollars will ultimately be returned anyway. Unfortunately, this approach is not really a viable option.

Notably, individuals who take a Coronavirus-Related Distribution in 2020 will receive a 1099-R for that distribution. The IRS, accordingly, will be looking for either inclusion of that income on an individual’s tax return (as allowed under the Coronavirus-Related Distribution rules) or an indication that the distribution has already been rolled over.

Furthermore, when an individual signs their Federal income tax return (or authorizes the return to be e-filed), they must declare that they have examined the return and that the information presented is accurate and complete. Clearly, stating that a rollover has already occurred, when no such transaction has been completed, would be a misrepresentation, which could result in any number of negative tax consequences for a taxpayer.

Thus, an individual should report income from a Coronavirus-Related Distribution on any return, as required, until the distribution has actually been repaid.

Benefit #4: No Mandatory Withholding For Employer-Sponsored Retirement Plan Distributions

In general, eligible rollover distributions taken from non-IRA-based employer-sponsored retirement plans are subject to a mandatory withholding requirement. More specifically, a minimum of 20% of such distributions is sent directly to the U.S. Treasury as pre-payment of income tax liability, in the form of withholdings (or, alternatively, a participant can voluntarily elect a higher withholding rate).

Coronavirus-Related Distributions, however, are exempt from this requirement. Therefore, the full amount of a requested plan distribution can be received by the plan participant, at a time when every dollar of cash flow may be needed.

Benefit #5: Coronavirus-Related Distributions Allow Access To Employer-Sponsored Defined Contribution Retirement Plan Funds Not Normally Available

Participants of employer-sponsored defined contribution retirement plans are generally limited with respect to the ability of taking a distribution of plan assets while working. More specifically, outside of a handful of exceptions, such as hardship distributions, plan participants under 59 ½ are generally unable to take a distribution of assets if they are still working for the employer sponsoring the plan.

Coronavirus-Related Distributions are not subject to these typical restrictions. Thus, an individual of any age is permitted to take a distribution from their employer-sponsored retirement plan of up to their entire vested balance, including salary deferrals, employer matching contributions, profit-sharing contributions, and earnings (up to the $100,000 maximum amount for Coronavirus-Related Distributions).

Of course, as noted above, while the tax law may permit such distributions, plans still have to be willing to adopt this change.

Using Coronavirus-Related Distributions For Alternative Planning Purposes

Clearly, the primary purpose of Congress’s inclusion of the Coronavirus-Related Distribution provision in the CARES Act was to allow individuals impacted by the COVID-19 crisis the ability to have greater access to retirement funds, with a lower-than-normal tax burden, as a way to cope with the financial burdens created by the virus; not as a planning tool for other purposes.

But, as is the case whenever there is a change in the law, individuals have looked to Coronavirus-Related Distributions to see how they may be used in ways perhaps not originally intended. While in some cases, these alternative uses of Coronavirus-Related Distributions seem appropriate, others seem to really stretch the purpose of the provision and should generally be avoided.

Using Coronavirus-Related Distributions To Fix Unwanted RMDs

One alternative use of a Coronavirus-Related Distribution is to allow an individual to return an unwanted RMD. Notably, the CARES Act eliminates RMDs for IRAs and employer-sponsored defined contribution plans for 2020… but it wasn’t enacted until March 27, 2020!

As such, there are many individuals who, prior to the passage of the CARES Act, took what they believed (at the time) to be their RMD for 2020, who would now like to roll over that (not-actually-an-RMD) distribution back into a retirement account. And while the 60-day rollover window, as well as IRS Notice 2020-23, offers relief for some in this situation, those individuals who took RMDs in January, or who have once-per-year rollover concerns, cannot benefit from either of these solutions.

Recall, however, that for qualifying individuals, the CARES Act allows distributions to be retroactively treated as a Coronavirus-Related Distributions all the way back to January 1, 2020… and Coronavirus-Related Distributions are not subject to the once-per-year rollover rule!

There is nothing in the language of the CARES Act that would suggest that treating an early-year RMD as a Coronavirus-Related Distribution, and using the three-year-rollover window that the provision offers to replace such amounts into a retirement account, would not be allowed.

Furthermore, interpreting the provision liberally (or at least not more restrictive than its plain language requires) to help individuals accomplish something that Congress explicitly supports (the elimination of RMDs for 2020) seems more than fair.

Using Coronavirus-Related Distributions To Get Normally Trapped Plan Money Out To An IRA

Another potential alternative use of a Coronavirus-Related Distribution is to use the distribution to pull money out of an employer-sponsored retirement plan and roll it over to an IRA when such distribution and/or rollover would normally not be allowed.

For instance, plan participants under the age of 59 ½ who are still working for the employer sponsoring their plan would generally be unable to access plan funds. Thus, even if the participant wanted to move all or a portion of their plan balance to an IRA, they would not be able to do so.

An exception to the general no-access-to-plan-money-prior-to-59 ½ rule is made for hardship distributions (which plans may – but don’t have to – offer). Such distributions, however, do not allow for plan funds to be moved to an IRA, as hardship distributions are not eligible to be rolled over.

Where allowed by a plan, however, Coronavirus-Related Distributions allow access to any vested balance of an individual (up to the $100,000 maximum amount) at any age. Furthermore, such distributions may be rolled over to any eligible retirement account, including an IRA, within a three-year period.

Thus, for those individuals eligible to take Coronavirus-Related Distributions, this seems like a viable solution. And while some may speculate that this is an abuse of the rules as set for by Congress, the fact is that rolling assets from a plan into an IRA doesn’t really produce any better tax treatment than by leaving them in the plan.

Furthermore, there are very legitimate COVID-19 crisis-related reasons to make such a transaction. Consider the following:

Example #8: In December 2020, Damian’s spouse is diagnosed with COVID-19. Damian, age 40, has no idea how long his spouse will be out of work and how long the family’s cash-flow may be impacted.

At the present time, Damian does not need to access the money from his 401(k) to support the family’s expenses, but if his wife is out of work for more than six months, that would be a distinct possibility.

Here’s the problem… If Damian does nothing and leaves his money in the 401(k) plan, but later needs to access to those funds in, say, May 2021, he may not be able to access them, as the Coronavirus-Related Distribution provision will have already expired (at the end of 2020).

As such, it may be wise for Bob to take a Coronavirus-Related Distribution from his plan in December and, if not needed at the time, roll it over to his IRA.

In doing so, he will avoid any tax due on the distribution as part of his 2020 income tax return and, if necessary, he will have access to the rolled over amount via an IRA distribution at a future date.

Using Coronavirus-Related Distributions To Spread Roth Conversion Income Over A Three-Year Window (Is NOT Advisable)

Another way that some people have considered using a Coronavirus-Related Distribution is to have the default, three-year income inclusion provision spread Roth conversion income from a 2020 conversion equally over 2020, 2021, and 2022. It is the author’s opinion that Coronavirus-Related Distributions should not be considered for this purpose.

Candidly, there is absolutely nothing in the CARES Act that suggests that such a transaction would not be allowed. Rather, if anything, the language used – that a distribution can be rolled over to an “eligible retirement plan” – would seem to suggest that such a transaction can be completed (as Roth IRAs are an eligible retirement plan).

But using a Coronavirus-Related Distribution for purely tax planning purposes seems dramatically at odds with the intended purpose of the provision and has the potential to significantly reduce an individual’s ultimate tax burden on the distributed income. This is different from either the return-of-an-RMD strategy (which is in line with Congressional intent of the CARES Act) or the move-money-from-a-plan-to-an-IRA approach (which does not provide any net tax reduction).

Accordingly, it’s entirely possible that the IRS could disallow the three-year income spread for Coronavirus-Related Distributions that are rolled over to Roth IRAs. Perhaps, for instance, the IRS would treat the distribution as first rolled back to an IRA and then converted to a Roth IRA via a ‘regular’ conversion (taxable all in one year). While there is nothing in the CARES Act that would suggest this treatment, the IRS has acted similarly in the past.

Notably, in IRS Notice 2009-75, the IRS shut down an NUA-Roth conversion strategy by treating NUA shares transferred to a Roth IRA as if they are first rolled to a Traditional IRA, and then converted from the Traditional IRA to a Roth IRA.

Ultimately, if the IRS chose to take a tack similar to that described above, they would collapse the three-year income split to being fully includable in 2020. That might increase the net total tax liability by pushing an individual into a higher tax bracket. And given the Tax Cuts and Jobs Act’s elimination of the recharacterization option, that would be a tax bill that the individual would be stuck with.

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The ongoing COVID-19 crisis has created a tremendous amount of economic damage in just a matter of months. Millions are without a job, and millions more have seen hours cut back, profits decline, or cash flow materially impacted in other ways.

While retirement accounts are generally best left for just that – retirement – there are times in an individual’s life where the needs of today may outweigh the needs in the future. Thankfully, for those who find themselves in such a situation as a result of the current COVID-19 crisis, the CARES Act-created Coronavirus-Related Distribution provides much-needed relief in the form of reduced costs and/or increased access to retirement dollars.

Ultimately, the key point is to remember that Coronavirus-Related Distributions represent a useful tool in the advisor toolbox to help those impacted by the COVID-19 crisis meet cash flow needs until things return to normal and clients get back on their feet.