How might the CARES Act impact your retirement accounts? Here’s what you need to know about tax and retirement relief in the time of the coronavirus.
So far in 2020, Congress has passed three bills that were intended to lessen the sting of the economic impact caused by the COVID-19 pandemic. The most recent of those bills is the Coronavirus Aid, Relief, and Economic Security (CARES) Act, which was passed into law in late March 2020.
“One of the biggest provisions of the CARES Act is that there are no required minimum distributions (RMDs) for 2020,” said Dara Luber, senior manager of retirement product at TD Ameritrade. “If you don’t need to take the money, you won’t have to.”
In addition to waiving 2020 RMDs, this waiver applies to inherited IRAs, so heirs can avoid RMDs for this year as well.
Updated information from July 2020: If you already took a RMD and didn’t need to, you may be able to roll the money back into your IRA. According to the IRS Notice 2020-51, you may repay the distribution amount taken between January 1, 2020 and June 23, 2020 to your IRA, anytime before August 31, 2020. The repayment of your RMD amount will not be treated as a 60-day rollover for the purposes of the one rollover per 12 month period limitation. Any amount above the RMD amount or taken June 24, 2020 or later will be treated as a 60-day rollover, provided you meet the requirements. (For example in an IRA: only one 60-day rollover is allowed in a 12 month period. 401(k) plans do not have this 12 month rule for 60-day rollovers).
Non-spouse beneficiaries may also return the RMD amount by August 31, 2020. Only the RMD amount (taken in 2020 before June 24, 2020) may be returned to the original account they were distributed from. Any amount taken after June 23, 2020 or an amount above the RMD may not be returned to the account.
Note: Distributions not rolled could be treated as Coronavirus Distributions if you are a Qualified individual, allowing you to pay the taxes on the distributions pro-rata over 3 years if desired. If you are a spouse beneficiary who is a Qualified Individual, you could also repay the amount considered to be a Coronavirus Distribution within 3 years (called a CRD “repayment”).
Please consult with a tax advisor for more details.
If you’re not retired yet, but the pandemic is causing economic stress, you may be able to avoid early withdrawal penalties if you need to take money from your retirement account.
“Normally, you’d need to be at least 59 1/2 to take penalty-free withdrawals from your accounts,” said Luber. “However, under these rules, if you, your spouse, or a member of your family has been impacted by coronavirus, , you may be able to take out money without paying that 10% penalty as long as you do it by December 31, 2020.”
In addition to taking money out of your retirement account without the withdrawal penalties, you can spread the tax payments on that money over the course of three years. One of the issues with withdrawing money from a tax-deferred account is that you still need to pay taxes. The CARES Act allows you to spread the bill out to make it more manageable, according to Luber. However, she still suggested working out the details with your accountant or a tax professional before proceeding.
Even for those who are older and don’t have to worry about an early withdrawal penalty, the ability to pay the taxes over the course of three years might still be helpful.
“Maybe you want to take a loan against your 401(k) instead of making an early withdrawal,” said Luber. “If that’s the case, the CARES Act can help you by doubling the loan limit.”
Normally, you’re limited to the lesser of $50,000 or 50% of your vested account balance. With the new measure, loans taken by September 22 could be as much as $100,000 or 100% of your vested account balance. If you need a bigger loan from your 401(k), and you want to be able to repay it and avoid the taxes on an early withdrawal, this might be a provision that could help.
On top of a higher loan limit, the CARES Act also allows retirement plan administrators to suspend loan repayments for the remainder of 2020. So if you have a 401(k) loan and it’s due to be repaid between the enactment of the CARES Act and December 31, 2020, you can get some extra time.
“It’s important to note that the loan limit and the ability to suspend repayments depends on your workplace retirement plan,” Luber warned. “Though the CARES Act permits plans to allow repayment suspension and loan limits, it is up to the plan and these new options aren’t granted automatically. Check with your plan administrator to see what your choices are.”
And if you are a business owner offering a 401(k), or profit sharing plan, remember you will have to decide whether it makes sense for your plan to allow the higher loan limits and the ability to suspend loan repayments. If you do, then make sure you document your choices with your plan provider.
There’s a lot going on right now with COVID-19, but the CARES Act offered a number of provisions that could help you keep your financial situation stable. Consider speaking with a retirement specialist or tax professional to get an idea of how the relief affects you and how you can use it to protect your nest egg.
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