Saturday July 11, 2020
How the Coronavirus Relief Law Helps Retirement Savers and Retirees
What can you tell me about the retirement account changes that Congress recently passed in response to the coronavirus crisis?
The Coronavirus Aid, Relief, and Economic Security Act, or CARES Act, was signed into law by President Trump in late March. Tucked inside were a series of changes that can help retirement savers. These changes can help those in need of cash, as well as help preserve the retirement savings accounts of current retirees while the stock market is down. Here is a rundown of 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 59½, you would be hit with taxes plus a 10% tax penalty on that amount. The CARES Act waives the early distribution penalty on up to $100,000 of distributions in 2020 for "affected individuals." You must still pay income taxes on any amounts withdrawn, but the new law allows you to pay the taxes over three years. Additionally, if you recontribute the amount withdrawn back into your plan within three years, that amount will not be taxed.
To qualify for this penalty-free hardship withdrawal, you, your spouse or a dependent must have been diagnosed with coronavirus (COVID-19) or have experienced adverse financial consequences as a result of COVID-19. This includes 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 have saved in your 401(k) or 403(b) during the six-month period after the law was implemented on March 27, 2020. IRAs do not allow loans.
Normally, you can borrow only up to $50,000 or 50% of your vested account balance, whichever is less. The CARES Act doubles that amount - up to $100,000 against the amount you have 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 if you leave or lose your job, you may be required to pay the balance back early, you could owe taxes and you may face an early-withdrawal penalty.
This provision also helps those with an existing 401(k) loan by allowing them to delay repayments that are due in 2020 for one year.
Beginning in 2020, individuals who turn 70½ after January 1, 2020 are required to take annual mandatory distributions from their tax-deferred 401(k)s and IRAs when they reach age 72. In prior years, the age of required distributions kicked in when savers turned 70½ years of age. This requirement is known as the required minimum distribution or RMD.
The CARES Act suspends RMDs for 2020, including those for inherited IRAs. This means you can skip taking a distribution this year if you wish.
The temporary 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. It will also give the market time to recover before resuming distributions in 2021.
Savvy Living is written by Jim Miller, a regular contributor to the NBC Today Show and author of "The Savvy Living" book. Any links in this article are offered as a service and there is no endorsement of any product. These articles are offered as a helpful and informative service to our friends and may not always reflect this organization's official position on some topics. Jim invites you to send your senior questions to: Savvy Living, P.O. Box 5443, Norman, OK 73070.
Published May 29, 2020
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