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.
As a reminder, “One of the biggest provisions of the CARES Act is that there are no required minimum distributions (RMDs) for 2020,” according to 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.
If, however, you’ve already taken a RMD and didn’t need to, you may be able to roll the money back into your IRA provided that you meet the requirements of only one 60-day rollover in a 12-month period.
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.
Of note in the CARES Act is the plan loan relief provided under section 2202 which permits an additional year for repayment of loans from eligible retirement plans (not including IRAs) and relaxes limits on loans, according to the IRS website.
Under section 2202, the CARES Act provides for a one-year delay for eligible loan repayments if the loan payment is due between the dates of March 27, 2020 and December 31, 2020. Any payments received after the designated suspension period will be adjusted to reflect the delay and any interest accruing during the delay.
The CARES Act also permits employers to increase the maximum loan amount available to qualified individuals. According to the IRS, plan loans made to a qualified individual from March 27, 2020, to September 22, 2020, the limit may be increased up to the lesser of: (1) $100,000 (minus outstanding plan loans of the individual), or (2) the individual’s vested benefit under the plan. For more details, refer to 5.A of Notice 2005-92 on the IRS website.
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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