The CARES Act and your IRA
Signed into law by President Donald Trump on March 27, 2020 the Coronavirus Aid, Relief and Economic Security Act (CARES) provides new legislation with the intended purpose of reducing the economic impact of the Covid-19 or novel coronavirus pandemic. This historic emergency relief act authorizes $2.1 trillion in aid which is targeted to seven sectors that could see the widest ranging impact from the pandemic: individuals, small business, large corporations, hospitals and public health, federal safety net, state and local governments and education. Specific relief provisions in the Act include corporate loans, small business loans, household payments, expansion of unemployment insurance and assistance to passenger air carriers. Here are some of the key provisions in this legislation affecting retirement plans.
Waiver of RMDs for 2020 – Required Minimum Distributions (RMDs) from retirement plans like 401(k)s, 403(b)s, 457(b)s, and IRAs are waived for 2020. The CARES Act removes the RMD requirement in 2020 for people 72 and older and this waiver also applies to IRA owners who turned 70.5 in 2019, since they otherwise would have been required to start taking RMDs by April 1, 2020. This new law also states that if you do not take your RMD in 2020, you will not be subject to the 50% penalty normally levied by the IRS. What if you have already received you RMD for 2020? If the distribution occurred in the last 60 days, you can return the funds as a 60-day rollover and avoid having it treated as a taxable distribution in 2020.
Coronavirus-Related Distributions – The CARES Act permits penalty free early distributions of up to $100,000 from IRAs and employer-sponsored plans for individuals who meet the following criteria: you, your spouse or a dependent has been diagnosed with Covid-19, you have suffered financial hardship due to quarantine or work furlough, you cannot work due to childcare needs or your business has closed or had its operations significantly reduced. This type of special distribution is subject to a unique set of rules. These distributions are penalty free even if you are under the age of 59.5 and the typical 10% penalty is waived. You can return the funds to your retirement account over three years and avoid any income tax. Taxes due on any funds not repaid can be divided equally over the next three years. Lastly, the normal 20% withholding on employer-sponsored retirement account distributions is waived.
Retirement Plan Loans – Loans from retirement plans have also been modified for individuals who meet the same criteria for coronavirus-related distributions. The maximum loan amount is increased for loans that are made between the enactment of the CARES Act (March 27th) and December 31, 2020. Normally the loan maximum is $50,000 or 50% of the vested account balance. During this period the maximum loan amount is increased to the lower of $100,000 or 100% of the vested account balance.
2019 IRA Contributions – Normally, you have until April 15th (of the year following the tax return year) to make your IRA contributions. As the US Treasury has extended the 2020 tax filing date until July 15 it has also extended to that date your last chance to make 2019 IRA and Roth IRA contributions.
In normal times, we want to avoid using our retirement savings for anything other than life in retirement. For the time being, the global Covid-19 pandemic has changed that dynamic. This historic relief act is intended to help Americans cope with the devastating economic toll brought on by this troubling health crisis. Use this moment in time to review your overall retirement plan and be prepared and willing to alter it, as needed.