ColumnistsFinancial Health

The CARES Act: What You Need to Know

By Jim Terwilliger

COVIDOn May 27, President Trump signed the CARES (Coronavirus Aid, Relief, and Economic Security) Act of 2020, providing unprecedented emergency relief to individuals and businesses impacted by COVID-19. Included in the legislation are several provisions impacting individual retirement accounts (IRA) and employer retirement plans. This article is intended to provide a high-level overview of just a few of these provisions.

Required Minimum Distributions (RMDs) Waived for 2020

This year’s RMDs are waived for all folks expecting to take RMDs from IRAs and most defined-contribution employer retirement plans in 2020. This waiver also applies to beneficiaries of inherited IRAs, Roth IRAs, and employer plans.

Also waived are any remaining 2019 first-year RMDs having an ultimate due date of April 1, 2020 and not withdrawn by Jan. 1, 2020. Fortunately, the CARES Act provides for a reversal of any Jan. 1 to April 1, 2020 distribution depending on circumstances as described below.

Not waived are distributions from defined-benefit employer plans, annuitized pension plans or non-governmental 457(b) deferred-compensation plans.

‘What is important is knowing how to adjust your retirement planning strategy to exploit [the CARES ACT] provisions in a way that is most beneficial to you.’

Unwanted Distributions Can Be Reversed

This helps those who already took what they thought were required distributions and now find they wish they had not. Such distributions can be reversed through an indirect rollover. Normally, non-RMD distributions taken from an IRA can be returned to the same IRA or another IRA if 1) the money is returned within 60 days and 2) there must not have been an IRA-to-IRA transfer within the previous 12 months. Accordingly, a reversal can accommodate only one unwanted 2020 IRA distribution.

IRS notice 2020-23 relaxed the 60-day limitation for an IRA distribution taken during the Feb. 1 to May 15 timeframe. For such a distribution, the deadline for returning the distribution is July 15. Absent a future notice, a January 2020 distribution is not reversible.

A reversed distribution is not taxable. Any tax withholding associated with the distribution, however, is not reversible. This withholding will be returned when filing a 2020 income tax return next year. Alternatively, one can reduce other 2020 withholding or estimated tax payments to compensate.

Rather than reverse a distribution, another option is to do a taxable Roth conversion, which is not subject to the once-per-year rule. The attractiveness of this option depends on one’s marginal federal tax bracket. A conversion normally must take place within 60 days, although IRS notice 2020-23 temporarily relaxed that constraint.

A reversal of employer plan distributions follows the same rules, although there is no limitation on the number of distributions that can be reversed. Also note that non-spouse beneficiaries are not able to reverse an RMD from an inherited IRA or employer retirement plan.

Additional Options for Those Directly Impacted by COVID-19

Coronavirus-related distributions (CRDs) up to $100,000 from IRAs or employer retirement plans are available to those who are diagnosed with COVID-19, whose spouses or dependents are so diagnosed, or who suffer adverse financial consequences as a result of the virus (as defined by CARES). Those under age 59-1/2 are exempt from a 10% early withdrawal penalty.

CRDs are taxable to the account owner. Paying the tax over a three-year period is the default option. To avoid taxation, CRDs can be repaid to the same/another IRA or eligible retirement plan with the repayment treated as having satisfied the 60-day rollover requirement if repaid during the three-year period following the date when the CRD was received.

Charitable Giving Enhancements

The CARES Act includes two provisions related to charitable giving. One allows for up to a $300 above-the-line charitable federal income tax deduction for folks who take the standard deduction. The other allows for up to 100% of adjusted gross income (vs. 60% standard) to be treated as a charitable deduction for taxpayers who itemize. For either, the contribution must be made in cash and does not include contributions to donor-advised funds or private foundations.

Additionally, it continues to be a sound tax-efficient strategy for those age 70-1/2 or older to make qualified charitable distributions (QCDs) from their IRAs directly to charity, even if not used to offset the taxability of RMDs.

2019 Contributions to IRAs and Roth IRAs

Consistent with the Treasury extending the tax return filing date to July 15, the date for making 2019 IRA and Roth IRA contributions is extended to the same date. Normally, contributions for a prior year must be made by April 15.

We’ve summarized some key CARES Act provisions. What is important is knowing how to adjust your retirement planning strategy to exploit these provisions in a way that is most beneficial to you. Partnering with a trusted financial planner is a great way to do just that.

James Terwilliger, CFP®, is senior vice president, senior planning adviser at CNB Wealth Management, Canandaigua National Bank & Trust Company. He can be reached at 585-419-0670 ext. 50630 or by email at