5 Facts Show How Retirement Distribution Rules Changed Under the CARES Act

When the government passed its $2 trillion economic recovery bill, the CARES Act, many entrepreneurs were focused on the small business loans and payroll tax deferral provisions in the law. But one aspect of the bill that entrepreneurs may have overlooked is the ability to take distributions from your retirement account without facing penalties.

Check out these five facts on how the bill could impact your small business.

1. The Limit Is $100,000

Under the CARES Act, you can withdraw up to $100,000 from eligible retirement plans (including IRAs) without a penalty as long as you take the money out between January 1 and December 31 of this year and fulfill specific requirements. The government does not impose any rules on how you must use the funds that you withdraw from your retirement account, advises Pankaj Shah, Director of Tax Services with Escalon Services.

2. You Must Meet These Conditions

To be eligible for the distribution, you must meet one of the following conditions, according to the CARES Act:

• Diagnosed with coronavirus,
• Spouse or dependent is diagnosed with coronavirus,
• Experienced adverse financial consequences as a result of:
  • Being quarantined
  • Having hours cut
  • Being laid off or furloughed
  • Being an entrepreneur who had to close or cut hours
  • Having an inability to work due to lack of childcare
  • Other adverse financial consequences related to coronavirus that will be specified in future IRS guidance.

3. You’ll Have to Pay It Back Within 3 Years

You’ll face no penalty on withdrawal of the funds, and you won’t have to pay taxes on the money, as long as you recontribute the money within three years, Shah says.

4. Not All Employer-Sponsored Plans Will Participate

Although the CARES Act has made it possible for those taking early withdrawals to avoid paying penalties or early withdrawal taxes, not all retirement plans will choose to adopt these provisions. It’s up to each individual benefit administrator to determine whether they will allow this for employer-sponsored plans.

If you are interested in making a withdrawal from your plan, contact your benefits administrator and ask whether it applies to you, Shah notes.

5. Maintain Records

Make sure you maintain records of any withdrawals you request, as well as proof that you meet the criteria for the CARES Act provisions. This might include documentation of a positive coronavirus test or written notice that you were laid off, as well as documents showing how much you withdrew.

The withdrawals are likely to require some notifications when tax time arrives next year, so maintain all documentation meticulously for your records, Shah advises.