Coronavirus-related distributions paid to qualified individuals:
- Are exempt from a 20% mandatory withholding otherwise applicable to workplace retirement plans
- Are exempt from 10% pre-mature withdrawal penalty for pre-age 59½ distributions
- Are subject to ordinary income tax
Though the distribution must be included in taxable income, if desired, it can be spread in equal installments over a period of up to three tax years, i.e. 2020-2023 (tax paid in 2021-2024).
In Notice 2020-50 published on June 19, the IRS clarified that the default approach is to spread the tax liability ratably over three years, from 2020 to 2022. Individuals may elect to include the entire CRD amount on their 2020 tax return. However, once elected, the income inclusion method may not be changed. For an individual who dies during the three-year repayment period, the remaining CRD balance is included in the final return.
This coronavirus-related distribution tax treatment is available to qualifying distributions taken on or after January 1, 2020 and through December 30, 2020
Those who take coronavirus-related distributions are also allowed to repay some or all of the amount taken over a three-year period from the date they actually receive the distribution. That amount may be moved to a retirement plan or an IRA.