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.
In late March 2020, the Coronavirus Aid, Relief, and Economic Security (CARES) Act was passed into law to help provide relief from the economic impacts of the COVID-19 pandemic.
The Act itself is huge—it’s hundreds of pages long. Part of this behemoth focuses on retirement relief. If you’re concerned about how the novel coronavirus will affect your finances and your nest egg, here’s what you need to know about the retirement provisions in the CARES Act.
The federal deadline for filing your tax return and making payments has been extended to July 15 for 2020. Along with that tax filing extension comes the ability to make later 2019 contributions to your traditional or Roth IRA. If you haven’t reached your limit and you’re able to contribute, you can spread things out until the July 15 date.
“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, because the law is retroactive to January 1, 2020, this also means that if you were supposed to take a 2019 RMD by now but didn’t, you can avoid the penalty. Plus, this waiver applies to inherited IRAs, so heirs can avoid RMDs for this year as well.
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 new IRS Notice 2020-23, as long as you took the distribution on or after February 1, 2020, you have an extension until July 15 to complete your 60-day rollover. You must also have not already completed a 60-day rollover in the last year. The law still only permits one IRA to IRA rollover in a 12-month period.
Note: You may do multiple rollovers of 401(k) plan distributions in a year. But if they are 2020 401(k) plan RMD’s, you have the same temporary reprieve from the 60-day rollover rule: only those RMD’s received on or after February 1, 2020 may be rolled into an IRA until July 15, 2020. Check with a tax professional to understand your specific circumstances.
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 have coronavirus or if you’re impacted by it, you can 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 offers 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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