How the CARES Act Affects Your IRA Account

The year 2020 was supposed to offer clear rule changes for IRAs, but that’s all changed due to the recent CARES Act. Here’s what IRA holders need to know.

COVID Financial Management

How the CARES Act Affects Your IRA Account

  • Andrew Ostlund
  • 6/18/2020

Key insights

  • The CARES Act brought several changes to IRA rules.
  • In 2020, RMDs from IRAs are waived, there are new rules for distributions (up to $100,000*) taken due to COVID-19, and the prior-year contribution deadline has been extended.
  • Consider these three strategies to take advantage of the recent IRA rule changes.

The year 2020 was supposed to be the year of perfect vision, especially for retirement accounts. We had new rules for required minimum distributions (RMDs) at age 72 under the Setting Every Community Up for Retirement Enhancement (SECURE) Act. Additional individual retirement account (IRA) changes were crystal clear.

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However, the Coronavirus Aid, Relief, and Economic Security (CARES) Act brought IRA changes and confusion. You may be asking “What should I do?” and “What does this new law mean to me?” Let’s take a quick look at how the CARES Act impacts IRA holders in 2020:

  • All RMDs for owners and beneficiaries of traditional IRAs, Simplified Employee Pension (SEP), and Savings Incentive Match Plan for Employees (SIMPLE) IRAs are waived
  • Distributions up to $100,000* made between January 1, 2020, and December 31, 2020, due to COVID-related events are not subject to the additional 10% tax on premature distributions 
  • Distributions up to $100,000* made between January 1, 2020, and December 31, 2020, due to COVID-related events can be recontributed or taxes can be paid ratably over a three-year period 
  • IRA holders can make 2019 contributions to their traditional or Roth IRAs through July 15, 2020, due to the tax filing due date postponement.

Now that you know how the CARES Act affects IRAs, let’s look at strategies you can employ to take advantage of these changes.

Strategy 1: Reduce taxable income to be eligible for the stimulus payment

If you have an adjusted gross income (AGI) of more than $198,000 for joint filers, $146,500 for head of household, or $99,000 for single filers (and didn’t qualify based upon 2019 or 2018 AGI), you are not eligible to receive a stimulus payment. If you don’t withdraw from your IRAs for 2020 and instead use Roth or other after-tax assets to fund your goals, you may be able to keep your AGI low enough to be eligible for the stimulus payment.

Example 1: John and Mary file a joint tax return in 2018 and 2019 with an AGI of $180,000. Due to their AGI, they were only eligible for a partial stimulus payment. In 2020, they do not take funds out of their pre-tax IRAs and instead use tax-free or after-tax assets. By doing so, they reduce their AGI to $150,000 in 2020. John and Mary receive an additional $1,500 of stimulus as a tax credit on their 2020 tax return.

Example 2: Jim is ready to file his 2019 joint tax return with an AGI of $160,000. His spouse is 55 years old with no earned income. Jim opens a spousal IRA and contributes $7,000 to a deductible IRA contribution for 2019, increasing the amount of stimulus money they receive by $350.

Strategy 2: Complete a rollover and avoid paying tax on your RMD

If you already removed your RMD for the year but didn’t need the money, you may be able to complete a rollover and return those funds to your IRA. IRS Notice 2020-51 allows you until August 31, 2020, to complete the rollover, even it if is past the standard 60 calendar days.

Example: Anita took out an entire year’s RMD of $6,000 on January 2 and put it in her savings account. Anita can complete a rollover and put that money back in her IRA to avoid tax consequences, as long as she completes the rollover by August 31, 2020.

Strategy 3: Take out $100,000* and recontribute or pay taxes owed over three years

If you find you need (the key being need) money out of your retirement accounts, you have the option to take funds from your IRA. Then, when your situation improves, work with your tax advisor to determine what is most appropriate: recontribute or pay taxes ratably.

Example 1: Sam gets furloughed without pay and needs to take $50,000 out of his IRA to cover living expenses. In late 2020, Sam returns to work and discusses with his tax advisor whether he should pay the tax or recontribute. His tax advisor shares both scenarios with Sam, and Sam decides to recontribute $25,000 in 2021 and $25,000 in 2022. Because these amounts were recontributed, Sam is eligible for a refund of all taxes paid on the distribution.

Example 2: Using the same situation from the previous example, Sam decides to pay the tax due instead of recontributing the funds. Since the distribution was related to COVID-19, the tax liability is spread over a three-year period, without penalty. Sam may recontribute funds to the IRA as late as December 31, 2022, reducing the tax paid in the earlier year. In this case, an amended return will be necessary to claim a refund for the tax paid associated with the recontribution.

How we can help

Think carefully about the repercussions of taking monies out of your retirement accounts. Work with your tax and investment advisors to determine if alternate strategies exist to meet your living expenses. Liquidating retirement accounts prematurely, especially in down markets, can be detrimental to the health of your investment portfolio and may require you to alter your retirement goals. At CLA Wealth Advisors, we can review your entire financial situation and model scenarios to help you determine how your goals might be impacted by the financial choices you make.

*$100,000 cumulatively among all of a taxpayer’s IRAs and other qualified plans

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Securities products, merger and acquisition services, and wealth advisory services are provided by CliftonLarsonAllen Wealth Advisors LLC, a federally registered investment advisor and member FINRA, SIPC.


  • Andrew Ostlund
  • Senior Wealth Advisor
  • CliftonLarsonAllen Wealth Advisors, LLC
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