CARES Act – Retirement Accounts and Help for Individuals

The CARES Act temporarily loosens rules on retirement accounts

On March 27, 2020 the President signed the CARES Act to provide immediate financial relief for businesses and individuals during the COVID-19 pandemic. While we have previously discussed the opportunities for businesses to seek relief, it is important to highlight some options now afforded to individuals. This law loosened the rules surrounding retirement accounts and how people use them, providing individuals the flexibility to address their own personal needs during the COVID-19 crisis. If you need money, you can take it. If you don’t need money, you don’t have to.  Please consider the updates below when it comes to funding or drawing on your retirement accounts during this time and the tax implications. Before making any changes to your accounts, always discuss with your tax professional and financial advisor.

Required Minimum Distributions Suspended

Under the CARES Act, required minimum distributions (RMD) have been suspended for 2020 for most qualified retirement plans, including inherited IRAs. This includes a waiver for those who are 70 ½ and would be required take their first RMD by April 1, 2020.

If you have already taken an RMD for 2020, but it has been distributed in the last 60 days, you can redeposit the funds into the account with no tax consequences. It is important to note that if you have taken advantage of this 60-day rule in the past twelve months, you are not eligible to use it in this instance.

If you choose to take RMDs (or make qualified charitable donations through RMDs), the rules remain the same for taxability (and deductibility) as in prior years.

The key takeaway from this is if you do not have a need to use money from your retirement account in 2020 it is worth considering not taking any money out until 2021. This will hopefully allow time for a market recovery and increased balance in the account.

RMD Age Increased

Previously, individuals must begin RMD’s in the year they turned 70 ½, but under the new law that age has been increased to 72 years old, effectively pushing back RMD’s for a couple of years for those turning 70 ½ during 2020.

Retirement Account Distributions

The CARES Act allows for effected individuals under 59 ½ to withdraw up to $100,000 penalty free from an IRA account if the funds are repaid into the account within three years. To qualify for this penalty free distribution, you must either 1) have a family member, or yourself diagnosed with COVID-19 or 2) have suffered financial consequences as a result of the pandemic. Consequences include reduction in income from quarantine, related layoffs, reduction in hours or being unable to work due to COVID-19 related issues beyond your control.

The 10% penalty waiver is retroactive to January 1, 2020, so if you had taken a distribution during the first quarter of the year, you may qualify for this waiver.

While the distribution is penalty free, it is not tax free. You will incur a tax liability similar to any other normal distribution based on the type of account, but the tax liability can be spread out over three subsequent years instead of being paid during 2020. If, or when, you recontribute the funds to the retirement account during the eligible period you can avoid some, or all, of the related taxes. These recontributions do not count toward normal annual contribution limits.

401(k) Loans

For the remainder of 2020, an individual can borrow the lessor of $100,000 or 100% of their balance, increased from the previous amount of the lessor of $50,000 or 50% of their balance. For any individual with an existing loan whose balance was due between March 27, 2020 and December 31, 2020, the repayment period can be extended for one year.

2019 IRA Contribution Date Extended

As the federal due date for individual tax returns and balances due was extended from April 15, 2020 to July 15, 2020, the CARES Act also extends the window to contribute to your IRA for the 2019 tax year.