The CARES Act and how it affects Retirement Account Regulations

The Coronavirus Aid, Relief, and Economic Security Act of 2020 (CARES Act of 2020) was signed on March 27, 2020.  This will provide more than US$2 trillion in relief for both companies and families affected by the COVID-19 Pandemic.  The economic fallout for families and employers has been extremely impactful, and hopefully, this relief package will make a significant difference.

The following excerpts focus on the benefits of the CARES Act for

  • required minimum distributions from retirement accounts and
  • special rules for use of retirement plan assets

Temporary Waiver of Required Minimum Distribution Rules

For 2020, the Required Minimum Distributions (RMDs) for most retirement accounts have been waived. RMDs are the minimum amount you are usually required to withdraw from retirement accounts for those who have attained 72 prior to January 1, 2020. This also includes any RMDs you might have deferred from 2019 (since April 1 was the deadline) and RMDs from inherited IRAs.

The idea here is that you are not required to take money out for 2020. And so, if you do not need your RMD to meet your living expenses, you can keep your money in the plan and you will not need to liquidate your investments during this interval where the markets have dropped.

Please note that if you have already taken your 2020 RMD, it could be “rolled over” in a separate (indirect) rollover transaction even back into the same Plan.  Remember, you pay normal taxes on all or any part of a 2020 RMD not rolled back into a qualifying plan in 2020.

Action: Contact us to discuss your particular situation. We can review your RMD requirements, help you work through your family budget, and help you decide the best approach for you.

Special Rules for Use of Retirement Plan Assets

This rule provides individuals affected by COVID-19 access to retirement savings that under current law would not be accessible or would be subject to a penalty when withdrawn.

Tax-favored Withdrawals from Retirement Plans

There is typically a 10% penalty for withdrawing money from your retirement accounts prior to turning 59½. This provision of the CARES Act waives the 10% early withdrawal tax penalty that generally is imposed on early withdrawals.  The penalty is waived for distributions up to US$100,000 made during the 2020 calendar year to an individual

  • who is diagnosed with COVID-19,
  • whose spouse or dependent is diagnosed with COVID-19, or
  • who experiences adverse financial consequences as a result of being quarantined, furloughed, laid off, having work hours reduced, being unable to work due to lack of child care due to COVID-19, closing or reducing hours of a business owned or operated by the individual due to COVID-19, or other factors as determined by the Treasury Secretary (a “Coronavirus-related Distribution”).  

The key point is that you can withdraw your money early if you really need it due to the impact of COVID-19.

Important facts: The taxes that you will pay on the withdrawals related to the Coronavirus-related Distribution may be spread over a three-year period. In addition, the provision also allows you to replace the funds over the next three years, even if that puts you over the annual contribution limit for your account. By replacing the funds, you do not recognize the amount as income. The three-year period commences on the day after the date on which the Coronavirus-related Distribution was received.

Action: If you would like to discuss the need to withdraw funds early from a retirement plan, please give us a call. We will assist you in determining the amount that you may need to withdraw and how this could be used to supplement your existing income.

Loans from Retirement Plans

The CARES Act relaxes some of the existing retirement plan loan rules for plans that offer loans. For individuals who are eligible for Coronavirus-related Distributions, the maximum distribution is raised to the lesser of US$100,000 (from US$50,000) or 100% (from 50%) of the participants’ vested account balance. This provision is available for loans made within 180 days following the enactment of the CARES Act. The provision also delays the repayment of existing loan obligations by one year. The decision to offer loans within a plan is an employer-driven decision.

Action: Contact us to review the loan provision of your Retirement Plan.

Important Disclosures

Investment advice offered through Shepherd Financial Partners, LLC, a registered investment advisor. Securities offered through LPL Financial, member FINRA/SIPC. Shepherd Financial Partners and LPL Financial are separate entities.

This information is not intended to be a substitute for specific individualized tax or legal advice. We suggest that you discuss your specific situation with a qualified tax or legal advisor.