On March 27, 2020, President Trump signed the Coronavirus Aid, Relief, and Economic Security (CARES) Act.
The new provisions cover a wide expanse of the economy, but here we’ll focus on the parts of the CARES Act that may have a direct impact on retirement accounts.
Note that the changes introduced by the CARES Act are NOT mandatory for employer-sponsored retirement plans. These changes are permissive, meaning that your employer may choose to incorporate some or none of these new provisions in their retirement plan.
Who is Affected?
First things first: the CARES Act makes many references to “qualified individuals.”
In this case, a qualified individual is someone who:
1. Has been diagnosed with COVID-19;
2. Has a spouse or tax dependent who is diagnosed with COVID-19; or
3. Experiences adverse financial consequences due to COVID-19, including:
- being quarantined;
- being furloughed, laid off, or having work hours reduced;
- being unable to work due to lack of childcare; or
- reduction in hours of a business owned or operated by the individual.
Changes to Retirement Plan Distributions
The CARES Act eliminates:
- The 10% early distribution penalty that typically applies to withdrawals from your retirement plan before you reach age 59½.
- The 20% federal income tax withholding that typically applies to retirement plan distributions.
- Participants may repay distributions within three years, or elect to spread the inclusion of income from distribution over three years.
- These exemptions apply on withdrawals made between January 1 and December 31, 2020, and up to a maximum of $100,000.
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Changes to 401(k) Loans
- If your 401(k) plan allows you to borrow from it, the CARES Act raises the maximum loan amount from $50,000 to $100,000, or the full amount of your vested account balance.
- Loan repayments for qualified individuals that are due between March 27, 2020 and December 31, 2020 may be postponed for one year.
Changes to Required Minimum Distributions
Individuals who have tax-deferred employer-sponsored retirement accounts (or traditional IRAs) are typically required to begin taking minimum distributions (RMDs) from those accounts by April 1 of the calendar year following the year in which the individual turns 70 ½, or the year in which the individual terminates employment.
- For this year, the CARES Act has exempted ALL retirement plan participants and IRA owners (not just qualified individuals) from having to take RMDs. The only exception to this is those participants who have a non-governmental 457(b) plan.
- In addition, the period over which distributions due to the death of the IRA owner or plan participant must be made has now been extended by one year.
If you or a loved one is a qualified individual under the new CARES Act and are wondering whether you should take money out of your retirement savings to cover bills, please consult one of our financial advisors. We offer complimentary, no-obligation consultations that can help you make the best decisions for you. Click here to schedule an appointment.