The CARES Act and Your Retirement

The $2.2 trillion Coronavirus Aid, Relief, and Economic Security (CARES) was passed in March of 2020.  It’s intended to help businesses and individuals financially hit by the job losses resulting from shelter-in-place and business closure orders.  But many people are unaware that there are provisions specific to retirement accounts, 401(k)s and IRAs in particular.  There is also an extension to Social Security withholding payments.  The full act is over 1,000 pages.  Add to that the thousands of pages of tax codes and you can understand why we can give only a high level summary here.  We hope it gives you an item or two to double-check with your professional tax adviser.

Required Minimum Disbursement (RMD) Waiver

Those over age 72 have been required to take a minimum disbursement from their 401(k), as well as from other retirement accounts.  But with the CARES act you can now decline to take the minimum disbursement for 2020 (this year only).  So you can leave your investments intact this year if you’ve suffered significant declines in the stock market.  You’ll also avoid paying taxes on a 2020 disbursement from qualifying plans.  If you’ve already taken a disbursement, the 60-day rollover may allow you to re-deposit the funds with no tax consequences.  The Act may also make Roth conversions easier and more beneficial.

Qualified charitable distributions may still be made in 2020 and not count as taxable income.  But they won’t offset any RMD, so it may be better to defer them until 2021

Withdrawals from Employer-Sponsored Retirement Plans

Those under age 59 1/2 who need to withdraw for living and healthcare expenses no longer face 10% penalty if one or more conditions are met.

  • You or your spouse were diagnosed with COVID-19 by a CDC-approved test.
  • You’ve experienced adverse finances after being furloughed, laid off, quarantined, or had work hours reduced.
  • You face financial consequences from school closures and a lack of childcare.

Withdrawals are limited to $100,000.  The change of rules is retroactive to January 1, 2020 but not all retirement plans qualify.

If repaid within 3 years the withdrawal can be considered a tax-free rollover, equivalent to a interest-free loan.  That’s especially important for those who hold IRAs, most of which don’t allow loans from the account.  Otherwise the withdrawal is taxed, without the 10% penalty and with no 20% automatic withholding.  But remember that those dollars are lost from your retirement balance.

401(k) Plan Loans

Prior loans from 401(k) retirement plans were limited to the lesser of $50,000 or 50% of the account balance.  They have been increased to $100,000 and 100% but those increases are limited to 180 days after the CARES Act was passed.  So the window of opportunity will be closing soon.

Such loans are not taxable as ordinary income, and under the Act borrowers have until December 31, 2021 to repay.  But they will count as a distribution if you leave the sponsoring company before the loan is repaid.

Additionally, the outstanding for a balance on a prior loan with a repayment deadline between March 27, 2020 and December 31, 2020 the deadline can be extended 1 year.

Social Security

Social security benefits are unchanged, but the Act allows employers and the self-employed to delay payment of Social Security taxes owed from March 27 through December 31, 2020 until as late as December 31, 2021.

Those who have lost a job or have had market holdings drop significantly may want to consider claiming benefits sooner.  In some situations it may be possible to repay those benefits within 1 year and return to deferral.

NOTE

This blog presents general information only and is not to be taken as specific advice or recommendations.  It is no substitute for individualized planning.  It is important to consult a professional financial or tax adviser before taking any action.

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