The CARES Act has enacted numerous provisions designed to help individuals directly affected by the coronavirus pandemic. A few of the CARES Act provisions set to provide economic relief, focus on individual retirement planning. This includes 401(k), 403(a), 403(b), IRAs, and a few other types of retirement vehicles. We will discuss the potential benefits of three main provisions that can be used to leverage your retirement savings accounts.
Early Retirement Plan Distributions
The CARES Act includes a provision that allows certain individuals to take early withdrawals from their retirement savings plans, penalty-free. You can take early withdrawals from your IRAs, 401(k) plans, and other specific retirement accounts up to $100,000 without incurring the 10% penalty for early distributions that is normally assessed. The waiver on the 10% early distribution penalty only applies to withdrawals made between January 1, 2020 and December 31, 2020.
This provides you with some possible economic relief in the event that you, a spouse, or dependent is diagnosed with COVID-19, if your ability to work has been impacted, or if you need to provide childcare to your own dependent. Aside from the waived early distribution penalty, another advantage is that you can repay the early distribution over a three-year period. The three-year period starts on the day after you take the early withdrawal and is independent of the annual retirement savings account’s 2020 contribution limit ($19,500 for 401(k) plans and $6,000 for IRAs). Also, you will not need to pay income tax on the money you take out as long as it is repaid to the account within this three-year period.
Retirement Plan Loan Increases
Taking a loan from one of your retirement plans is another beneficial planning aspect offered by the CARES Act. The Cares Act impacts retirement plan loans by increasing the loan amount to the lesser of $100,000 or 100% of the account’s vested balance. If you are a qualified individual, you must execute the loan within 180 days of March 27, 2020. Also, if you have outstanding retirement plan loan payments between March 27, 2020 and December 31, 2020, you can request to defer payments for an additional year.
The benefit of taking a loan from your retirement plan is that the interest rates and loan fees may be less than the rates that usually come with a credit advance or personal loan. Also, you are borrowing the money from yourself so the interest that you pay on this loan is repaid back into your own retirement savings account. Additionally, you will not need to pay income tax on the loan if you repay the loan in full within five years. By deferring loan repayments, you can take advantage of additional income in your paycheck for the remainder of 2020, when you may need it more.
Required Minimum Distributions
Another way the CARES Act could affect your retirement planning is through a provision that impacts Required Minimum Distributions (RMDs). This provision postpones RMDs from retirement accounts for those already taking them or for those who will take their first RMD in 2020.
Not having to take RMDs in 2020 allows retirement accounts time to rebound for the year and retirees to benefit from possible recuperated losses that may have occurred with the stock market’s downturn at the beginning of the year.
All of these opportunities impacted by the CARES Act provisions can have a significant effect on your retirement planning and what funds may be available to you now and in the future. If you have been impacted by the coronavirus pandemic, we suggest you contact your accountant or financial advisor to discuss your best options.