CARES Act Review Part II: Retirement Account Provisions

Photo Credit: Kelly Sikkema, Unsplash

There are several retirement account provisions in the CARES ACT meant to reduce your tax liability or help with current cash flow or both. Here are the details:

1. RMD-REQUIRED MINIMUM DISTRIBUTIONS

You don’t have to take your RMD (Required Minimum Distribution) for 2020, whether it be from an IRA (regular, Simple, SEP), inherited IRA, 401(k) plans, 403(b) plans or 457(b) plans.

PLANNING TIP: If you already withdrew your RMD for 2020, and the withdrawal has been within 60 days, you can redeposit it to your account and avoid tax. If a distribution was taken more than 60 days ago and you can qualify for the coronavirus-related distribution (described below) you can redeposit it and avoid tax. Note: Non-spouse inherited IRA beneficiaries cannot redeposit the withdrawal. 

2CORONAVIRUS DISTRIBUTIONS FROM RETIREMENT ACCOUNTS  – new more tax-friendly rules 

For 2020, the 10% penalty will be waived for taking an early distribution from your IRA or employer plan. Previously, distributions before the age of 59 1/2 incurred a 10% penalty in addition to tax owed (with a few hardship withdrawal exceptions).

  • The distribution can be up to $100,000
  • It must be taken in 2020
  • The income is spread over 3 years for tax purposes unless you proactively elect to include it all in 2020
  • Beginning on the day after receipt of a Coronavirus-related distribution, an individual has up to three years to repay the amount as qualified rollover distribution (in one or multiple payments). Any distribution going back to January 1, 2020 qualifies

PLANNING TIP:  If you elect to take a distribution, it may be beneficial to include the entire distribution in 2020 if you expect your income to significantly decline in 2020 and be higher in future years).​​​​​​

PLANNING TIP: In a perfect world, withdrawing from retirement accounts early should be a last resort. These accounts get tax-deferral benefits to incentivize us to save for our future non-earning years. The compounding that happens when the money is left to grow tax-deferred is invaluable in building a nest egg. However, keeping that caution in mind, these are challenging times and the loosening up of these rules may be very helpful to many people. The good news is that there is a way to pay it back and avoid tax and penalties.

 Eligibility (very broad):

  •  People diagnosed with COVID-19, or have a spouse or dependents diagnosed with the virus.
  •  People who are experiencing adverse financial consequences as a result of being quarantined, furloughed, laid off, reduced hours, unable to work because of childcare issues, and a handful of other similar reasons.
  •  Business owners that had to close or operate under reduced hours
  •  Meet some other reason that the IRS decides to say is OK

3. ​​​​​​​COMPANY RETIREMENT PLAN LOANS – a provision to further expand company retirement plan loans (like from a 401(k):

  • The maximum amount of an allowable plan loan doubled from $50,000 to $100,000
  • The loan may be for up to the present value of the participant’s account
  • Payment on plan loan otherwise owed may be delayed for one year

In addition, the usual 20% mandatory tax withholding for non-direct rollovers from company plans is waived for 2020.  However, you will still need to pay tax (at tax time) on any amounts that you don’t roll back into a retirement plan within 60 days.

Next up: A review of enhanced Unemployment Benefits in the CARES Act

If you missed Part I: Stimulus Payments go here.