Dear Savvy Senior,
What can you tell me about the retirement account changes that Congress recently passed in response to the coronavirus crisis?
Tucked into the Coronavirus Aid, Relief, and Economic Security Act, or CARES Act, that President Trump signed into law in late March were a series of changes that can help retirement savers in need of cash, as well as help preserve the retirement savings accounts of current retirees while the stock market is down. Here’s a rundown to how three provisions in the CARES Act might help you, or someone you know.
Normally, if you took money out of an employer-sponsored retirement plan or IRA before 59 ½, you’d be hit with taxes and a 10 percent tax penalty on that amount. But the CARES Act waives the early distribution penalty on up to $100,000 of such distributions in 2020 for what the law calls “affected individuals.” You are, however, still on the hook for income taxes on any amounts withdrawn, but the new law allows you to pay them over three years.
To qualify for this penalty-free hardship withdrawal, you must either have been diagnosed with coronavirus (COVID-19), have a spouse or dependent diagnosed with it or experienced adverse financial consequences as a result of being quarantined, furloughed, laid off, having work hours reduced, being unable to work due to a lack of child care due to COVID-19, or closing or reducing hours of a business you owned or operated if you had COVID-19.
The CARES Act will also allow you to take larger loans against the money you’ve saved in your 401(k) or 403(b) during the six-month period after the law was implemented, which was March 27. IRAs do not allow loans.
Normally, you can borrow only up to $50,000 or 50 percent of your vested account balance, whichever is less. The CARES Act will double that: up to $100,000 against the amount you’ve saved in your plan.
Borrowers typically have five years to repay a loan or the amount will be treated as a distribution and taxed. But you also need to know that if you leave or lose your job, you may be required to pay back the balance early, or owe taxes and, possibly, an early-withdrawal penalty.
This prevision also helps those with an existing 401(k) loan by allowing them to delay repayments that are due in 2020 for one year.
Starting in 2020, individuals who turn 72 are required to take annual mandatory distributions from their tax-deferred 401(k)s and IRAs. In prior years, this requirement kicked in after savers turned 70½ years of age.
This is known as the required minimum distribution or RMDs.
The CARES Act suspends RMDs for 2020, including those for inherited IRAs, which means you can skip taking your required distributions this year if you wish.
The one-year waiver of RMDs will help retirees, who would otherwise have been forced to base their minimum withdrawals for 2020 on their account balances as of Dec. 31, 2019, when the stock market was near record levels.