Smart Tax Planning

IRS expands eligibility to take up to a $100,000 coronavirus-related withdrawal from IRA, 401(k)

Key Points
  • The IRS releases guidance broadening the number of people who can take coronavirus-related distributions from 401(k) plans and individual retirement accounts.
  • If your spouse has lost his or her job due to coronavirus or had a job offer rescinded due to the pandemic, you can take up to $100,000 from your own retirement account.

More people will be eligible to take a $100,000 coronavirus-related distribution from their retirement account.

The IRS released guidance on Friday which details new rules for individuals affected by Covid-19 to take a withdrawal from a 401(k) plan or an individual retirement account.

The CARES Act allows savers to take coronavirus-related distributions – emergency withdrawals – of up to $100,000 from their retirement plans and IRAs. And those who are under age 59½ can access the money without the usual 10% early withdrawal penalty.

These individuals can also spread the income tax from the withdrawal over three years. However, if they repay the money into the account within that time periods, they can avoid the tax.

IRS expands eligibility to tap 401(k) amid coronavirus pandemic

The new guidance expands eligibility.  Initially, it applied just to people who had coronavirus or their spouse or dependent who had the disease, as well as those who were laid off, furloughed or had hours reduced, those unable to work due to lack of childcare and entrepreneurs who shuttered their businesses.

Now, people who had a job start date delayed or an offer rescinded due to Covid-19 also can take a withdrawal.

In addition, the rules now permit a spouse, even if still employed, with a retirement account to take a coronavirus-related distribution of up to $100,000 from his or her account, Levine said.

"The spouse thing is pretty big," said Jeffrey Levine, CPA and director of advanced planning at Buckingham Wealth Partners in Long Island, New York. "I had a lot of people in that camp, where the spouse was out of work and didn't have significant retirement account assets."

Retirement plan consultant Denise Appleby says eligibility can also expand beyond a spouse. "If you experience adverse financial consequences, because a member of your household, related to you or not, had their income adversely affected by COVID-9, you are eligible for the $100,000  coronavirus-related distributions," she said.

"Remember, it's still not a good thing: You're taking your own money and you'll owe the taxes," said Ed Slott, CPA and founder of Ed Slott & Co. in Rockville Centre, New York.

RMDs and coronavirus-related distributions

Lucy Lambriex

The CARES Act had also relieved IRA and 401(k) holders of required minimum distributions – those mandatory withdrawals you must begin taking at age 72.

The problem taxpayers were facing was that some had taken their 2020 RMD as early as January.

Normally, you can redeposit a withdrawal into your IRA within 60 days of taking the distribution if you haven't made rollovers from one IRA to another in the last 12 months. Indeed, some people "undid" their RMDs this spring in this manner.

People who took an early RMD at the start of the year were well out of the 60-day window by the time the CARES Act became law on March 27.

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The IRS is giving some of these people relief.

Distributions taken from Jan. 1, 2020 through the end of the year may be treated as "coronavirus-related distributions." That means you can spread the taxes over three years.

There's a catch: You can only do this if you're a qualifying individual. 

That is, you were diagnosed with coronavirus, your spouse or dependent was diagnosed with the condition, or you had experienced adverse financial consequences due to Covid-19.

Those who don't meet the definition won't qualify.

CNBC's senior personal finance correspondent Sharon Epperson contributed to this story.