On May 4, 2020, the Internal Revenue Service (IRS) published questions and answers regarding retirement provisions in Section 2202 of the Coronavirus Aid, Relief, and Economic Security (CARES) Act. In addition to providing aid for individuals and businesses, the CARES Act increases accessibility to funds and loans from certain retirement plans and accounts. The information the IRS recently published clarifies which individuals may benefit from the legislation and which plans and accounts are covered.
Retirement Account Rules Established by the CARES Act
Under the CARES Act, individuals may withdraw up to $100,000 in coronavirus-related distributions from certain retirement accounts. Distributions are deemed “coronavirus-related” if they are withdrawn from approved plans between Jan. 1-Dec. 30, 2020, by individuals who have been adversely affected by COVID-19 in various specified ways (discussed below). Distributions may be taken from 401(k), 403(b), and individual retirement accounts (IRAs). Under normal circumstances, there is normally a 10 percent penalty for those who are under the age of 59.5 and withdraw funds from these accounts; however, the CARES Act waives this penalty.
In addition to expanding access to retirement distributions, eligible individuals may also take loans of up to $100,000 from their employer-sponsored retirement plans. Prior to the Act, the limit was $50,000 or 50 percent of the vested account balance. Any loans taken under this provision must be entered into by Sept. 22, 2020. For existing loans, payment due dates have been extended, and repayment is not required through Dec. 31, 2020.
Like much of the legislation pertaining to COVID-19, the retirement relief sections were designed to provide broad coverage. According to the IRS, a qualified participant is eligible for the expanded access set forth in Section 2202 if the participant, the participant's spouse, or the participant's dependent was either diagnosed with COVID-19 using a test approved by the Centers for Disease Control and Prevention (CDC) or has experienced adverse financial consequences caused by COVID-19. The financial adverse consequences experienced by the participant must be the result of one of the following scenarios:
- The participant has been quarantined, furloughed, laid off, or has experienced a reduction of work hours due to COVID-19;
- The participant has been unable to work due to the lack of childcare caused by COVID-19; or
- The participant has had to reduce business hours or close a business the participant owns or operates due to COVID-19.
An individual who falls within any of these categories is eligible for the expanded distribution and loan options available under the CARES Act.
Additional Benefits for Individuals of Retirement Age
The CARES Act also temporarily suspends required minimum distributions (RMDs) from IRAs, and 401(k) and 403(b) retirement accounts. In general, once an individual reaches a certain age (currently 72), the government mandates that the individual begin taking out a minimum distribution to ensure that these retirement funds are not left untouched indefinitely. This provision is unique in that it is not limited to retirees impacted by COVID-19.
The suspension also applies to:
- Individuals who turned 70.5 in 2019 and are account holders who did not take their RMDs in 2019,
- Individuals who are 72 years old or older and are account holders, and
- Beneficiaries of inherited IRAs for decedents who died before 2020
This suspension allows retirees to keep their money in the market longer. For individuals who have already taken their distributions, some may be able to redeposit these amounts via rollover provisions. In the past, the IRS allowed the rollover of funds within sixty days of withdrawal. However, under the CARES Act, the sixty-day rollover period has been extended to July 15.
A Word of Caution
Despite the various new options available under the CARES Act, it is important to carefully consider whether distributions should be taken from any accounts. The tax implications of these options vary, and they should be acted upon only after careful consideration of an individual's personal goals and capacity.
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