How the CARES Act Impacts Your Retirement Accounts
The Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) was signed into law by President Trump on March 27, 2020, primarily to assist individuals and businesses with the financial implications of COVID-19. The CARES Act includes several provisions relating to retirement plans that plan participants should be aware of, including the waiver of required minimum distributions (“RMDs”), the extension of time to make 2019 IRA contributions, and changes to the rules for early distributions and plan loans.
RMDs Waived for 2020
Individuals age 72 and older are normally required to take minimum distributions from their retirement accounts each year. However, the CARES Act states that individuals with defined contribution plans such as 401(k)s, 403(b)s, 457(b)s, and IRAs may skip their RMDs in 2020. The waiver also applies to individuals who turned 70 ½ in 2019 and were required to take their RMD by April 1, 2020. Individuals do not need to meet any COVID-19 qualifications to waive their 2020 RMD.
The CARES Act also addresses inherited retirement accounts, specifically those inherited by “non-designated beneficiaries” (namely charities, estates, and non-qualified trusts), that typically must be fully distributed within five years of the account owner’s date of death. The CARES Act provides that if one of the five years falls within 2020, the beneficiary gets an extra year, essentially turning the five-year rule into a six-year rule.
The CARES Act does not directly address those who have already taken their RMD for 2020, however, if you took your RMD within the last 60 days, you may be able to roll over that amount to an IRA to avoid a taxable distribution in 2020.
Deadline for 2019 IRA Contributions Extended
Taxpayers normally have until April 15 (the same as tax day) to make the previous year’s IRA contributions. Now that taxpayers have until July 15, 2020 to file their 2019 income tax returns, the Treasury Department has also given taxpayers until July 15 to make 2019 contributions to IRAs. The maximum annual IRA contribution is $6,000, or $7,000 if you are age 50 or older.
Early Distributions and Loans
The CARES Act also expands access to early distributions and loans for qualifying individuals impacted by the coronavirus.
Individuals qualifying for relief include the following:
- Individuals diagnosed with SARS-CoV-2 or COVID-19 by a test approved by the CDC,
- Individuals whose spouse or dependents are similarly diagnosed, or
- Individuals who experience adverse financial consequences as a result of being quarantined, being furloughed or laid off or having work hours reduced due to SARS or COVID-19, being unable to work due to lack of child care, closing or reducing hours of a business owned or operated by the individual, or other factors as determined by the Secretary of the Treasury.
In general, early withdrawals from retirement plans by individuals under the age of 59 ½ are subject to a 10% early withdrawal penalty. However, for qualifying individuals, the CARES Act eliminates the 10% penalty for up to $100,000 of retirement plan distributions. Income tax will apply to the distributions, but any income tax owed may be paid proportionally over three tax years, beginning with this year. The individual may also “pay back” the coronavirus distribution at any time during the three-year period following the date of distribution, without regard to annual contribution limits.
Additionally, those affected by COVID-19 who wish to borrow from their qualified employer plan can now take out a larger loan. During the 180-day period following March 27, 2020, the amount that can be taken as a loan from a qualified employer plan is increased to the lesser of $100,000 or 100% of the individual’s vested account balance. Loans were previously capped at $50,000 or 50% of the vested account balance. In addition, for those who have outstanding plan loans, if the repayment due date falls after March 27, 2020 and before December 31, 2020, the due date will be delayed by one year.
We expect the IRS to issue additional guidance in the coming days and weeks to address questions raised by the new CARES Acts provisions. We will be monitoring that guidance closely and providing additional updates. If you have questions about how the CARES Act impacts your retirement accounts please contact Tara Stark at [email protected]
This article provides a general overview of the law. It is not intended to be, and should not be construed as, legal advice for any particular fact situation.