The CARES Act is geared towards providing relief for businesses, but it does contain provisions that change rules about retirement plans for 2020.
Required Minimum Distributions
Required minimum distributions (RMDs) from IRAs, 401(k)s, 403(b)s and other retirement plans have been suspended for 2020. At least part of the rationale likely was that the RMDs are based off year-end 2019 balances, current account balances are generally much lower based on the drop in the markets in the wake of the coronavirus.
The waiver includes RMDs for those who reached age 70½ and who would be required to take their first RMD by April 1 of 2020. This waiver also includes RMDs from inherited IRAs for 2020.
Combined with the SECURE Act that moved the commencement of RMDS for those who had not reached age 70½ before January 1, 2020, to age 72, this has effectively pushed the initial RMD back several years for those who turn 70½ in 2020.
Those who need to take money from their retirement accounts can still do so, of course. This money will be taxed as in past years.
Those who use some or all of their RMD from an IRA to make contributions to a charity as a qualified charitable distribution (QCD) can continue to do this. The amount of the QCD will be excluded from your income as in past years.
For those who have already taken their 2020 RMD, there are some limited options. One option is the 60-day rollover rule as applied to IRAs. If you took your 2020 RMD within the past 60 days, you could redeposit it into the IRA with no tax consequence. If more than 60 days have elapsed, you are out of luck, unless the government changes the rules on this to accommodate these situations. It's also important to note that the 60-day rule can only be used once within 12 months. Those who have taken their RMD from an inherited IRA will not be able to take advantage of this as it does not apply to an inherited IRA.
The 60-day rule is complex, be sure to consult with a knowledgeable tax or financial adviser, or with your IRA custodian to ensure you execute this type of transaction correctly.
Retirement Account Distributions
The CARES Act has created the ability for individuals to withdraw up to $100,000 from retirement accounts such as a 401(k) or an IRA account in total without having to pay a 10% penalty if they are under age 59½.
To qualify for this relief you need to fall into one of two categories.
- You, your spouse or a dependent is diagnosed with COVID-19.
- You have suffered financial consequences as a result of the pandemic. These might include reduced income from being quarantined or furloughed, having your hours reduced, being unable to work due to childcare issues or other issues beyond your control arising out of this situation.
This waiver of the 10% penalty is retroactive to January 1, 2020, so if you had taken a distribution from your retirement plan earlier in the year that had been subject to the penalty it will now qualify for this waiver.
While the distribution will still be subject to taxes as with any retirement account distribution, the tax liability can be spread out over the next three years. Additionally, you will be able to “re-contribute” the money back into the account over the next three years to avoid some or all of the taxes. These contributions can be made without regard to the normal plan contribution limits.
Not all retirement plans will allow these COVID-19 withdrawals, so check with your plan administrator in the case of an employer-sponsored retirement plan like a 401(k) to see if your plan will be offering this option.
The CARES Act doubles the maximum amount that can be borrowed from a 401(k) from the lesser of $50,000 or 50% of the plan participant’s account balance to the lessor of $100,000 or 100% of the participant’s balance. These limits extend through the end of 2020.
You are supposed to demonstrate some sort of hardship from the COVID-19 crisis, but this is a self-certification process so it generally should not take much if any sort of documentation. Each plan administrator might treat this differently, however.
Anyone with an outstanding loan balance from their plan and whose repayment is due between March 27, 2020, and December 31, 2020, can extend their repayment period for one year.
Note that retirement plan sponsors can adopt these new rules for loans and hardship withdrawals immediately without doing a formal amendment to their plan documents. The plan sponsor will need to make a formal amendment to the plan, but the date to do this has been pushed out as a provision of the CARES Act.
What to Consider
Everyone’s situation is a bit different; here are a few things to consider.
With the waiver of the RMD, there is no downside. Skipping your RMD in 2020 means that you don’t reduce your account balance any more than the recent decline in the stock market already has. You also will not owe any taxes on an RMD for 2020 when you file your taxes.
You still can take a distribution from the account if you need the money. Any distribution taken will reduce your account balance at the end of 2020, potentially reducing your 2021 RMD.
As for the relaxed rules on retirement account distributions and 401(k) loans, again your circumstances should drive your actions on either or both of these options. If you’ve experienced financial hardship due to the COVID-19 pandemic these might be solid options for you. A few things to remember here:
- To the extent that money is distributed from your retirement account, this money is lost as far as funding your retirement needs if you are unable to recontribute the funds, as discussed above. There would also be a tax liability for the funds not contributed as well.
- A 401(k) loan may be a better alternative; however, it is important to remember that a loan can become a taxable distribution if you leave the company before paying the loan back.
- It is wise to review other options for your short-term cash needs beyond either a 401(k) loan or a distribution from your retirement account if possible to be sure you are looking at all potential remedies available to you during this tough economic period.