CARES Act Options
Unless you have been living under a rock, you are aware that the Coronavirus Aid, Relief and Economic Security (CARES) Act was passed into law with lightning speed in March 2020. Many of you have received a nice deposit into your banking account because of the Act, and I have been pleasantly surprised with the sensible things I have heard people doing with the money – those who are fortunate enough to be able to consider that money as “extra”. I have opened college savings funds for children using stimulus money, and have begun more than a few Roth IRAS. Wise moves, all.
Some of the big changes brought by the CARES Act have to do with retirement money, which – as you know – is in my wheelhouse. I’ll outline a few of these changes.
Coronavirus-related withdrawals from a 401(k) are now allowed penalty-free for those affected by the coronavirus. While the 401(k) plan administrator reserves the right to make final judgment and decisions, this includes anyone who contracted COVID-19, whose spouse or dependents contracted it, or who lost their job or income because of the quarantine. (Again, individual plan administrators will have specific requirements for burden of proof.) If you are affected, you may be eligible to withdraw up to $100,000 total from all retirement accounts, including retirement plans and IRAS. If you’re younger than age 59-1/2, the ten-percent federal penalty tax that usually applies will be waived. Because of the CARES Act, this type of withdrawal is not subject to a mandatory 20-percent withholding for taxes. Instead, ten percent will be automatically withheld unless you opt out. Note that you will continue to owe taxes on the money, which is treated as earned income; it’s just that you can choose to pay any owed taxes at the time of that year’s filing. You may avoid taxes on the distribution(s) altogether if you roll over the money back into your account within three years. Note that three years is a greatly-enhanced time period for such repayment.
If you have a loan on your 401(k) plan, you might now be eligible for a one-year suspension of required repayment if you have been directly affected by the coronavirus. This includes anyone who either contracted COVID-19, whose spouse or dependents contracted it, or who lost their job or income because of the quarantine. (Again, plan administrators have final say.) Additionally, you might now have extra time to pay back your loan once payments resume. Please note that this is not loan forgiveness; the loan does still have to be repaid. If you leave an employer with a 401(k) loan outstanding, your choices are to repay the loan in a lump sum, or take that outstanding balance as income for the year. Neither situation is ideal, which is one of the many reasons I caution against 401(k) loans.
With regard to required minimum distributions (RMDS) from retirement plans and/or IRAS, those RMDS are being waived for 2020. This change affects anyone who turned age 70-1/2 in 2019 or earlier and would have been required to take an RMD. That said, if you have already been receiving RMDS and were scheduled for one in 2020, you will still receive it unless you contact the holding company to suspend it. Likewise, if you receive payments throughout the year (as opposed to a lump sum in December) and choose to suspend your 2020 RMD, payments will be suspended for the rest of the year. Don’t misunderstand… If you want to get your RMDS like normal, you may do so. It’s the requirement to take the distribution that has been waived.
If you read my column regularly, you know that I am a staunch advocate for leaving retirement money for retirement purposes. I strongly advise anyone to use caution when considering any of these options. The 401k is a way of providing income in your retirement, and such an opportunity as provided by the CARES Act should not be considered a windfall opportunity. I encourage you to consult a tax advisor before making withdrawals, suspending contributions or suspending loan repayments, especially during a time of volatile market activity. Tax issues can be complex; again, please consult a tax advisor before taking any action.
Times are strange, my friends. The CARES Act has made it easier to access money if we need it, and easier to leave money alone if we don’t need it, but it has also – in my opinion – made it easier to make mistakes that can cost us in the long run. Act wisely, and please make informed decisions!