CARES Act and Retirement Relief
Provided by Beneficent Financial – Home of the Safe Money Lady
In late March 2020, the Coronavirus Aid, Relief, and Economic Security (CARES) Act was passed into law to help provide relief from the economic impacts of the COVID-19 pandemic.
The Act itself is vast—it’s hundreds of pages long. Part of this behemoth focuses on retirement relief. If you’re concerned about how the novel coronavirus will affect your finances and nest egg, here’s what you need to know about the retirement provisions in the CARES Act.
Extended Deadlines for 2019 Contributions: The federal deadline for filing your tax return and making payments has extended to July 15 for 2020. Along with that tax filing extension comes the ability to make later 2019 contributions to your traditional or Roth IRA. If you haven’t reached your limit and can contribute, you can spread things out until the July 15 date.
No RMDs for 2020: One of the most prominent provisions of the CARES Act is that there are no required minimum distributions (RMDs) for 2020, If you don’t need to take the money, you won’t have to.
In addition to waiving 2020 RMDs, because the law is retroactive to January 1, 2020, this also means that if you were supposed to take a 2019 RMD by now but didn’t, you could avoid the penalty. Plus, this waiver applies to inherited IRAs so that heirs can avoid RMDs for this year as well.
If you already took an RMD and didn’t need to, you may be able to roll the money back into your IRA. According to the new IRS Notice 2020-23, if you took the distribution on or after February 1, 2020, you have an extension until July 15 to complete a 60-day rollover. You must also have not already completed a 60-day rollover in the last year. The law still only permits one IRA to IRA rollover in 12 months.
Note: You may do multiple rollovers of 401(k) plan distributions in a year. But if they are 2020 401(k) plan RMD’s, you have the same reprieve from the 60-day rollover rule: only those RMD’s received on or after February 1, 2020, maybe rolled into an IRA until July 15, 2020.
Avoid Early Withdrawal Penalties: If you’re not retired yet, but the pandemic is causing economic stress, you may be able to avoid early withdrawal penalties if you need to take money from your retirement account.
Typically, you’d need to be at least 59 1/2 to take penalty-free withdrawals from your accounts. However, under these rules, if you have coronavirus or if you’re impacted by it, you can take out money without paying that 10% penalty as long as you do it by December 31, 2020.
In addition to taking money out of your retirement account without the withdrawal penalties, you can spread the tax payments on that money over three years. One of the issues with withdrawing money from a tax-deferred account is that you still need to pay taxes. The CARES Act allows you to spread the bill out to make it more manageable.
Even for those who are older and don’t have to worry about an early withdrawal penalty, the ability to pay the taxes over three years might still be helpful.
Double the 401(k) Loan Limit: Maybe you want to take a loan against your 401(k) instead of making an early withdrawal. If that’s the case, the CARES Act can help you by doubling the loan limit.
Typically, you’re limited to the lesser of $50,000 or 50% of your vested account balance. With the new measure, loans taken by September 22 could be as much as $100,000 or 100% of your vested account balance. If you need a bigger loan from your 401(k), and you want to be able to repay it and avoid the taxes on an early withdrawal, this might be a provision that could help.
On top of a higher loan limit, the CARES Act allows retirement plan administrators to suspend loan repayments for the remainder of 2020. So if you have a 401(k) loan and it’s due to be repaid between the enactment of the CARES Act and December 31, 2020, you can get some extra time.
It’s important to note that the loan limit depends on your workplace retirement plan. Though the CARES Act requires plans to allow repayment suspensions, loan limits are up to the plan and aren’t granted automatically.
Bottom Line on CARES Act Relief: A lot is going on right now with COVID-19, but the CARES Act offers several provisions that could help keep your financial situation stable. Consider scheduling a Strategy Visit to get an idea of how the relief affects you and how you can use it to protect your nest egg.
