Q. I hear that under the CARES Act, my wife and I may each be able to withdraw up to $100K from our IRA’s without penalty and without tax. Is that true?

A. Well, not quite. Here’s the deal: Under the recently passed Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”), Congress did recently pass legislation permitting IRA plan owners who experienced adverse financial consequences as a result of the COVID-19 Pandemic to each withdraw up to $100K this year from their own retirement plans, (1) without having to pay the 10% penalty that would otherwise apply for those persons under age 59.5, and    (2) to ultimately do it income tax free provided that they fully repay these withdrawals within 3 years (i.e, before 12/31/2023).  But here’s the rub:  until those funds are repaid, the distributions would be taxable income, reportable on your Form 1040, and tax would have to be paid on them!

For those persons able to fully repay these distributions within the 3 year window, they would ultimately get to do it “tax free” if they then went back and amended each of their tax returns for years 2020, 2021, and 2022, to thereby recover the income tax paid in each of those 3 years. In essence, they would then have received an interest free loan from their own IRA’s.

However, my concern is that many folks who might opt for this withdrawal will later be unable to fully repay it, and will then be stuck with the income tax that they paid in each of those intervening three years.  As I see it, that is the big downside.

That said, taking advantage of this benefit might make sense in the following limited situations:

1) You are in dire need of funds and are OK with taking a loan from your IRA;

2) You had lower income than usual in year 2020 due to loss of employment or reduced business income, so that your income tax would be less;

3) You had business losses that exceeded income, so that your income was negative and not subject to tax.

Consider, also, the possibility that income tax rates in years 2021—2023, might be higher than they are now, thereby obligating the IRA owner who is unable to repay the “loan” for even more tax than under current law.

In any event, I would strongly recommend that you seek the advice of your tax or financial advisor before going down this path. In most situations, one would need to be especially disciplined about timely repayment to make the withdrawal worthwhile.