Eric McGraw
Eric McGraw
CARES Act – Retirement Account Provisions

CARES Act – Retirement Account Provisions


The CARES Act, intended to assist individuals and businesses withstand the financials consequences of COVID-19, included several important provisions related to retirement accounts. This article will discuss the provisions related to early withdrawals, retirement plan loans, and required minimum distributions (RMD.) Please note that the CARES Act does not require retirement plans to adopt these provisions, and the options described below may not be available for your retirement plan.


Generally, early withdrawals from retirement accounts are subject to a 10% income tax penalty, and mandatory income tax withholding of 20%. There are a few exceptions to these penalties, such as first-time homebuyers using the distribution as a down payment on a house, or the use of the distribution to pay for medical expenses, etc.

The CARES Act provides taxpayers with a new exception related to COVID-19. To be eligible, a taxpayer must meet one of the following criteria:

  • The taxpayer has been diagnosed with COVID-19
  • The taxpayer’s spouse or dependent has been diagnosed with COVID-19
  • The taxpayer was unable to work because childcare was unavailable
  • The taxpayer was laid off, furloughed, experienced reduced hours, or was otherwise unable to work due to COVID-19
  • The taxpayer owns or operates a business that had to close or reduce hours due to COVID-19

The CARES Act permits eligible plan participants to take an early distribution of up to $100,000 without incurring the 10% penalty normally imposed on early distributions. The $100,000 distribution limit is an aggregate total per person, not per account. In other words, a person may take a total of $100,000 in such distributions, regardless of how many retirement accounts that person owns. At the moment, only distributions taken from January 1, 2020 to December 31, 2020 will qualify.

The CARES Act also removes the normal 20% federal income withholding requirement for early withdrawals. It will therefore be possible to take an early distribution without withholding for income tax.

Keep in mind that the CARES Act does not make early distributions tax free. It simply removes the penalties that would have been assessed in addition to normal taxes. Distributions will be reported to the IRS and the plan participant on Form 1099-R. When the distributions are subsequently reported on the participant’s individual tax return, it may result in an income tax liability.

However, the CARES Act does provide flexible terms for payment of any tax liability resulting from a qualifying distribution. A participant may choose to either pay the tax with the 2020 tax return, or the tax can be spread out over three years.

In addition, a participant has the option of redepositing the distribution into their retirement account in order to eliminate the tax. This action does not count as a retirement contribution and is therefore not subject to contribution limitations. Normally this must be done within 60 days, but the CARES Act extends this to 36 months. This extended time period may require careful cash flow planning. Because tax returns will be filed within the 36-month period, it may be necessary to pay the tax on the withdrawal before redepositing it. If this occurs, an amended return would then be required in order to receive a refund of the tax paid.


Distributing funds from a retirement account is not the only way to convert savings into spendable cash. Many, but not all, retirement plans allow participants to take a loan from their own retirement account. This alternative is attractive because it does not generate an income tax liability if the repayment terms are fulfilled.  

The CARES Act provides additional relief for retirement plan loans for those individuals eligible under the criteria detailed in the section above. This relief is available for any loan taken out between March 27, 2020 and September 23, 2020.

Normally, a participant may borrow the lesser of 50% of the vested balance, or $50,000. Repayments must occur within 5 years, and payments start almost immediately after the loan is made.

The CARES Act provides two points of relief. First, the borrowing limit is increased to the lesser of 100% of the vested balance, or $100,000. Second, payments may be deferred for the entirety of 2020. If deferment is elected, the 5-year loan term begins in 2021. However, interest will accrue during the 2020 deferral period.


The CARES Act allows retirement account owners to forgo RMDs for the 2020 tax year. If an RMD has already been taken, it can be returned to the retirement account within a 60-day period following the distribution. Note that in order to eliminate the taxable income possibly generated by the RMD, the entire amount of the RMD, including income tax withholding, must be returned to the retirement account. The tax withholding cannot be reversed and will be held by the IRS until the 2020 tax return is filed.

Beneficiaries normally required to take an RMD are also able to forgo taking an RMD for the 2020 tax year. However, if an RMD has already been taken it cannot be returned to the retirement account.


Please note that this article does not constitute financial advice. Please consult with your financial advisor and/or CPA before taking any of the actions described above. If you would like to discuss how these provisions apply to you, please contact one of your ADKF service team members. If you are not yet a client of our firm, we would be delighted to conduct an initial consultation at no charge.

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