The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) has implemented many forms of relief in response to the COVID-19 pandemic. In this post, we will discuss the provisions relating to retirement accounts and the key benefits available. Please note that this article is being provided for informational purposes only. Nothing contained herein constitutes legal advice and we highly recommend that you consult with a lawyer, CPA and/or financial advisor before making decisions related to your retirement account(s).
Retirement Withdrawals
The Cares Act provides for the temporary elimination of the normal 10% tax penalty on early withdrawals from certain types of accounts, with a $100,000.00 limit per person. However, in order to be eligible for this benefit you must have a must have a valid COVID-19 related reason for early access to the funds, such as:
Being diagnosed with COVID-19;
Having a spouse or dependent diagnosed with COVID-19; or
Experiencing a layoff, furlough, reduction in hours, or inability to work due to COVID-19 or lack of childcare because of COVID-19.
Please note that the CARES Act does not require employers to follow these rules so be sure to ask your plan sponsor if they are participating. Also note that you may be required to provide proof that COVID-19 affected you personally.
Withholding Requirement
The CARES ACT suspended the mandatory 20% tax withholding requirement that you normally have to pay when you do an early distribution from a 401(k) or other workplace retirement plan. However, you will still be liable for the ultimate tax on this distribution. The CARES Act just gives you more flexibility on when you pay this amount in two ways: 1) You don’t have to pay the withholding at the time when you withdraw the funds; and 2) You can choose to spread the tax payment out over the next three years. While this is a good benefit, mindful planning is needed to ensure that this does not create a potential tax landmine in the future.
Retirement Loans
Under normal circumstances, owners of certain workplace retirement accounts can borrow up to $50,000 or 50% of their vested balance, whichever is less. The CARES Act bumps the legal loan limit up to 100% of the vested balance or $100,000, whichever is less. The CARES Act also allows borrowers to forgo repayment during 2020 and starts the five-year repayment clock in 2021, which gives borrowers an extra year to repay their loans. But please note that loans will still accrue interest in 2020.
Required Minimum Distributions
The CARES Act suspended the 50% penalty that taxpayers usually owe if they fail to withdraw their required minimum distributions (RMD). If you have already taken your 2020 RMD and the distribution was within the past 60 days, the CARES Act allows you to designate the distribution as an eligible rollover distribution, allowing you to put the funds back into your account. If you took your RMD more than 60 days ago, there is currently no legislation that will allow you to roll it over.
Reasons to take a distribution? Because you need it. The economic fallout from the pandemic has only added to people's need for their RMD this year.
Reasons to not take a distribution? It is generally good practice to only withdraw from your retirement account if you must or if there is a need. If you currently do not have a need then you can leave the money in your retirement account, which will hopefully benefit from an economic recovery down the road. You would also avoid having to pay taxes on the distribution.
As a reminder, it is always best to consult with lawyers, CPAs, and/or financial advisors when making important financial decisions.