Whether you are retired or are some years away from that stage of life, the Coronavirus Aid, Relief and Economic Security Act (CARES) made changes to retirement plan rules that may help ease financial difficulties in this downturn.

The CARES Act expands options for taking distributions from retirement accounts and limits the tax impact of doing so. Other changes increase the amount a qualified individual can borrow from employer plans such as 401(k) and 403(b) accounts while extending the repayment period.

Distribution Penalties Waived

Those directly affected by COVID-19 can now tap into their employer retirement plan or IRA balances for financial relief, without the 10 percent penalty normally charged for taking distributions before age 59.5. The CARES Act waives the penalty for withdrawals of up to $100,000 taken between January 1 and December 30, 2020.

Taxes must be paid on the funds withdrawn, but under the CARES Act, plans are not required to automatically withhold the 20 percent tax. Account holders can receive the full distribution and pay taxes later. What’s more, the distribution income can be reported over three years to spread out the tax impact.

You can repay all or part of the distribution into a qualified account, and if repaid within three years, the distribution income is not taxable. After repaying, you will need to file amended tax returns for any year in which you counted the distribution as income to claim a refund for tax paid on that amount.

Larger Loans from 401(k)s

The CARES Act doubled the limit you can borrow from an employer plan such as a 401(k) or 403(b), to $100,000 or 100 percent of your vested balance in the account. If you have an existing loan from a retirement account that comes due March 27 through December 30, 2020, you can delay repayment for an extra year.

The Fine Print

To qualify for coronavirus-related relief through retirement plans and IRAs:

  • you or your spouse or dependent must have been diagnosed with COVID-19, or
  • you must have experienced financial loss as a result of quarantine, furlough, unemployment, reduced hours, or being unable to work due to childcare obligations. Other issues arising out of the pandemic may qualify.

Note that while the CARES Act allows plans to offer these more lenient terms for distributions and loans, they are not required to do so. Check with your plan provider to see what your options may be.

No Required Minimum Distribution

One last important change suspends any required minimum distributions (RMDs) in 2020. If you need the income, you may take the RMD, but if you prefer, you may skip the 2020 distribution.

This provides flexibility in managing your future income. Given sharp declines in the market, current balances may be much lower. Because RMDs are based on your balance at the end of 2019, which is likely higher, it might take a larger bite out of remaining savings than desired. Waiving the RMD for this year gives your accounts more time to recover and grow.

The RMD waiver includes those who reached the age of 70.5 by December 31, 2019 and would normally be required to take their first distribution by April 1. (Those just turning 70 can delay their initial RMDs even further; under a separate law that took effect January 1, 2020, the age when distributions must start was pushed back to 72.5.)

RMDs from inherited IRAs are also waived in 2020. And if you already took an RMD and now opt not to, you can roll the income back into an IRA within 60 days and avoid the taxes due on the distribution.

For help assessing how these changes can benefit your current financial status or retirement, contact us.
—Toni Shears