How the CARES Act Can Affect Your Retirement

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How the CARES Act Can Affect Your Retirement

Signed by President Trump on Friday March 27, the Coronavirus Aid, Relief and Economic Security (“CARES”) Act is the third phase of Congress’s coronavirus response.  Initial reports focused on the big ticket items like direct payments to Americans who pay taxes, small business relief, support for state and local governments and measures to cover coronavirus testing.  However, like any bill passed to allocate an unprecedented $2 trillion in support, the lead stories can’t cover everything. For those with retirement accounts, some helpful nuggets are found deeper in the details.

Two of these changes are designed to provide financial flexibility for those who have been impacted by COVID-19, a distinction that will apply to more and more of us as time passes.  This could include you, a spouse, or a dependent having been diagnosed with COVID-19 directly. This could mean you are unable to work, or your business is closed or operates under reduced hours due to COVID-19.  This could mean you experienced adverse financial consequences due to quarantine, furlough, having been laid off or reduced work hours because of COVID-19.

Distributions from retirement accounts:  You may withdraw up to $100,000 from a combination of IRAs or employer plans to cover expenses related to COVID-19.  These withdrawals must be made in 2020 and come with some new benefits.

  • Distributions are exempt from the 10% early withdrawal penalty for those under 59.5 years of age.
  • If funds are drawn from an employer plan, they are not subject to mandatory withholdings.
  • While not treated specifically as a loan, funds are eligible to be repaid over three years.
  • Any taxes will still be due, but can be paid over the next three years.

Loans from Employer plans:  Certain changes have been made to loan provisions when borrowing from an employer work plan.

  • The maximum loan amount has been increased from $50,000 to $100,000.
  • 100% of vested balances may be used for the loan.
  • Payments on plan loans currently owed may be delayed by one year.

The third change does not require a direct impact from COVID-19, but still offers financial flexibility to manage taxes due for certain taxpayers.

Required Minimum Distributions are waived for 2020:  This third change applies to anyone who must take a required minimum distribution (“RMD”) from their retirement account in 2020, including those who were scheduled to take that distribution for the first time.  This applies to IRAs as well as employer retirement plans. It also applies to inherited IRAs, and 2020 is ignored under the 5-year distribution schedule for non-spousal beneficiaries.

What if you already took your RMD for 2020?  If you did it within the last 60 days, you can roll it back.  If you meet the conditions above, you can treat it as a COVID-19 distribution and pay the associated taxes over the next three years.  There is no option to roll back distributions from inherited accounts.

All these changes can be helpful, in the right situations.  If you want to take advantage of these changes, it would be smart to check with your tax advisor first.

Visit our COVID-19 landing page to read more articles about COVID-19.

 

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2020-05-07T13:54:54-05:00 April 3rd, 2020|COVID-19, Financial Planning|0 Comments