How to Minimize Taxes When You Take a Coronavirus-Related Retirement Plan Distribution in 2020

If you took or are considering a coronavirus-related distribution (not a loan) from your 401(k) or traditional IRA between January 1, 2020 and December 30, 2020 the IRS , under the CARES Act, allows you to report the income and pay the taxes from this distribution over a three year period.  You could also avoid the income taxes altogether if you “pay back” what you took out. Interpretation of the rules and procedures regarding this recent legislation via the CARES Act continues to evolve, but this is what we know so far.

Is/was your distribution coronavirus-related?

When the CARES Act was signed into law during late March 2020, many people mistakenly assumed they could take penalty-free early withdrawals from their retirement plans for any reason (for example, to buy a house).  This is not the case, however, according to the IRS (Heidman, 2020, IRS, 2020b). Favorable and penalty-free tax treatment of coronavirus-related retirement plan withdrawals are available only if these specific conditions apply:

  • You, your spouse, or dependent(s) were diagnosed with SARS-CoV-2 or COVID-19 using a test approved by the Centers for Disease Control and Prevention;
  • You endured adverse financial effects due to quarantine, furlough, layoff, reduced work hours, or lack of childcare due to SARS-CoV-2 or COVID-19;
  • You were forced to close or reduce hours of a business you own due to SARS-CoV-2 or COVID-19, resulting in adverse financial consequences.
  • The individual having a reduction in pay (or self-employment income) due to COVID-19 or having a job offer rescinded or start date for a job delayed due to COVID-19;
  • The individual’s spouse or a member of the individual’s household (as defined below) being quarantined, being furloughed or laid off, or having work hours reduced due to COVID-19, being unable to work due to lack of childcare due to COVID-19, having a reduction in pay (or self-employment income) due to COVID-19, or having a job offer rescinded or start date for a job delayed due to COVID-19; or
  • Closing or reducing hours of a business owned or operated by the individual’s spouse or a member of the individual’s household* due to COVID-19.

* For purposes of applying these additional factors, a member of the individual’s household is someone who shares the individual’s principal residence.

At the time this article was written (December 2020), it is important to note that the U.S. Treasury Department and the IRS were still considering future guidance that could expand the list of factors that might determine whether an individual experienced adverse financial conditions and may qualify for favorable tax treatment of early retirement plan distributions under the CARES Act.  In other words, proceed with caution if you are not sure if your actual or anticipated retirement account distribution qualifies as “coronavirus-related.”

Has your retirement plan at work adopted CARES Act changes?

If you took a distribution from an Individual Retirement Account (IRA), you can skip this part. However, if your distribution was or will be from a 401(k), 403(b), or similar retirement plan sponsored by your employer, this part does apply to you. Although the CARES Act makes allowances for larger and tax-friendlier early retirement plan distributions, it does not require employers to adopt these provisions. It simply makes them available if your employer chooses to adopt them.

Specifically, “It is optional for employers to adopt the distribution and loan rules of section 2202 of the CARES Act” (IRS, 2020). Therefore, you should contact your employer before you request an early distribution from your retirement plan and ask if your retirement plan at work specifically adopted CARES Act provisions.

It’s also important to note that if your employer does not implement the CARES Act rules, there may still be relief available for distributions taken.  Per the IRS, “Even if an employer does not treat a distribution as coronavirus-related, a qualified individual may treat a distribution that meets the requirements to be a coronavirus-related distribution as coronavirus-related on the individual’s federal income tax return” (IRS, 2020a).

How to spread out tax payments.

Assuming your retirement plan distribution qualifies under the CARES Act, you do not have to include all of the distribution on your 2020 Federal Income Tax Return. Instead, you can spread the income (and related taxes) over a three-year period. For example, if you took a $30,000 distribution in 2020, when you file your income taxes, you would simply report $10,000 of income on your federal income tax return for each tax year in 2020, 2021, and 2022 (IRS, 2020).  By including only a portion of the distribution in each of the 3 years, you spread the tax on the distribution over the three years as well.

How to avoid income taxes owed (i.e., pay back what you took out).

You also have the option of not paying any income taxes at all on your coronavirus-related retirement plan distribution if you move funds back (recontribute) into a qualified retirement account (e.g., IRA, 401(k), etc.) within three years. For example, if you took a coronavirus-related distribution from an IRA or 401(k) in 2020, the CARES Act allows you to repay some or all of the amount you took out by placing funds into an eligible retirement plan within three years of taking the distribution. The amount “paid back” would be treated like a retirement account trustee to trustee rollover, meaning the repaid amount would avoid federal income tax, and it would also not count against the current year’s contribution limit (Heidman, 2020).  

The way taxpayers will report these repayments (recontributions) of coronavirus-related distributions is not entirely clear at present (Heidman, 2020).  However, it is generally expected that IRS Form 8915-E (expected to be available before December 31, 2020) and amended tax returns will be used to report recontributions of coronavirus-related distributions (IRS, 2020).  As the saying goes, “stay tuned for official news and information.”

Where to find more information.

The IRS has provided a very helpful list of questions and answers regarding tax questions related to coronavirus-related retirement plan distributions. The Consumer Financial Protection Bureau (CFPB) also discusses some helpful CARES Act rules (Ortiz & Scheithe, 2020). As always, if you still cannot find answers to your specific questions, consult with a local tax professional.


Heidman, R. (2020, July 2). IRAs and Coronavirus -related Distributions and Repayments. Wolters Kluwer.

IRS. (2020a).  Coronavirus-related relief for retirement plans and IRAs questions and answers

IRS. (2020b) Guidance for Coronavirus-Related Distributions and Loans from Retirment Plans Under the CARES Act. Notice 2020-50.

Ortiz, H. and Scheithe, E. (2020, June 30). Considering an early retirement withdrawal? CARES Act rules and what you should know. Consumer Financial Protection Bureau.

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