Congress passed the Coronavirus Aid, Relief, and Economic Security (CARES) Act and it was signed into law on Friday March 27th. This piece of legislation has many components to provide relief to individuals and businesses to help mitigate negative impacts of the Coronavirus, including several that alter the rules surrounding retirement plans for 2020.
Required Minimum Distributions
Required Minimum Distributions have been suspended for 2020. This means that if you are normally required to take a distribution from an IRA, either your own account or an inherited account, you do not have to take a distribution in 2020.
In addition to not having to take your RMD, any amount that has been distributed from an IRA in the last sixty days can be treated as a rollover and returned to your retirement account. This is an option as long as you have not done another rollover in the last year. Unfortunately, if you have already taken your RMD from a non-spousal Inherited IRA you will have to keep it. Amounts distributed from Inherited IRAs cannot be rolled over and are therefore ineligible for the 60 day rollover provision.
Early Withdrawals and 401(k) Loans
There are several ways that the CARES Act relaxes rules on retirement accounts for 2020 in order to make funds available to taxpayers in need. When a taxpayer can show that they need to withdraw from a retirement account because they are impacted by the Coronavirus, the distributions have several potential tax benefits:
- Exempt from the 10% Penalty – If you are under the age of 59 ½, there is normally a penalty for withdrawing from retirement funds, which is waived for Coronavirus related distributions. This applies on distributions up to $100,000.
- Three year rules – Any amounts withdrawn from the retirement account as a Coronavirus distribution can be rolled back into a retirement account within three years. Alternatively, you can choose to spread the income from the distribution evenly over three tax years.
- Mandatory Withholding Waived – Coronavirus distributions are exempt from mandatory withholding requirements. Typically employer sponsored plans are required to withhold at least 20% for Federal taxes.
If you need to take a distribution from a retirement account to manage the effects of the coronavirus, check with your adviser on whether you qualify for the Coronavirus related tax treatment.
The CARES Act also relaxed rules on 401(k) loans. The bill increased the maximum loans amount to $100,000 from $50,000 and allows 100% of your vested plan balance to be used as a loan, up from 50%. Any amounts due from loan enactment through the end of 2020 can also be delayed for one year.
2020 Retirement Account Planning
The effect of the market drop and the CARES Act on retirement accounts creates some unique planning opportunities in 2020. Those that no longer need to take a retirement account distribution can evaluate their options for cash flow and tax planning in light of these changes. For some, there may be an advantage in using the market dip to convert IRA account assets to a Roth account assets. Contact your Cassady Schiller Wealth Management adviser with any questions you have on these changes and how they can impact you.