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Distributions from retirement accounts taxed over 3 year spread

Among the many provisions provided by the CARES Act is the Coronavirus-Related Distribution for individuals affected by COVID-19. You can now take up to $100,000 out of your IRA and pay it back within three years with no tax hit.
Coronavirus-Related Distributions of up to $100,000 can be made from IRAs, employer-sponsored defined contribution plans, and/or employer-sponsored defined benefit plans in 2020 (and 2020 only) by a qualifying individual.
Any funds distributed are still considered taxable income, though the income can be spread over three tax years beginning in 2020. For those taking a distribution and where 2020 is a low-income year, electing to tax all income in 2020 may be an optimal tax planning strategy.
Anyone who qualifies (qualifications below) as being affected by the coronavirus pandemic can take up to a $100,000 distribution from their traditional IRAs. 
What does this mean?

  1. If you are below 59 and 1/2, you avoid the 10% tax penalty added to early distributions.
  2. If you plan on taking this money out of your retirement account permanently, you will be still taxed on this money as income, but can choose to pay the tax liability immediately or spread the tax liability over the next three years. 
  3. You can return your retirement funds to the IRA in a contribution over the next three years. This will allow you to avoid the tax liability completely. In short, this is an interest-free “loan” from your IRA as long as you follow the rules. 

What are some ways people can take advantage of this policy?
If you take money out as a distribution now, you can keep it out for three years, and refill your IRA by smaller contributions or one lump sum payment in 2022 tax year. 
Want to learn more? Contact me!