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In this post, we will highlight some of the ways that participants in qualified retirement plans, like 104(k) and 403(b) plans, and IRAs have new options thanks to the CARES Act.
Distributions Related to COVID-19
Typically, you cannot take distributions from a qualified plan or IRA prior to age 59 ½ without incurring a tax penalty, in addition to regular tax. The CARES Act allows for a new exception for distributions taken in 2020 related to coronavirus.
A plan participant may take a payout of up to $100,000 for an individual (or their spouse) who is diagnosed with COVID-19 or has experienced adverse financial consequences as a result of having work hours reduced or being laid off, furloughed, or being quarantined due to COVID-19.
These COVID-19 related distributions are still taxable; however, you can now pay off the tax liability over three years. You may also avoid the tax liability completely by redepositing the same amount in a qualified plan or IRA within the three-year window. The normal time period for rollover is 60 days from distribution.
Required Minimum Distributions
Participants in qualified plans and IRAs must begin taking required minimum distributions (RMDs) in the year after the year in which they reach age 72.
The CARES Act suspends the rules for RMDs for 2020, including for inherited accounts.
RMDs are based on life expectancy and account balances as of December 31 of the prior year. This would have resulted in artificially high minimum distributions for many who have sustained investment losses in their retirement accounts this year.
If someone receives or has received an RMD, they may roll it over into another plan or IRA within 60 days without any tax liability. Also, RMDs made between February 1 and May 15 can still be rolled over by July 15. The IRS has not yet issued guidance regarding distributions made in January and whether they will waive the usual restriction of allowing only one IRA rollover per year; however, they are expected to announce soon.
IRA Contributions
The IRS, in conjunction with the CARES Act roll-out, extended the due date for making IRA contributions for the 209 tax year (IRS Notice 2020-18). Individual taxpayers have until July 15 to make a contribution to a traditional or Roth IRA (or both). The combined total for contributions can’t exceed the lesser of earned income or $6,000 ($7,000 if you’re age 50 or older).
Retirement Plan Loans
The CARES Act changes the rules for hardship loans from certain qualified plans (like 401k) made between March 27, 2020 and September 23, 2020. These key provisions include:
Doubling the maximum amount you may borrow from $50,000 to $100,000. It also allows participants to take 100% of their vested benefit as a loan.
Extending the due date for loan repayment due in 2020 by one year.
If hardship distributions or loans are not currently permitted by a retirement plan, they may adopt these provisions, as long as the plan is amended by 2022.