The CARES Act and Your Retirement Plans: If You Need It, Take It. If You Don’t, You Don’t Have to.
April 03, 2020
By Scott Testa
If you need money, you can take it. A “qualified individual” can in 2020 take up to $100,000 in “coronavirus-related” distributions from an IRA or qualified retirement plan and:
- Not have to pay the 10% early distribution penalty even if you are under age 59½; and
- Not have to withhold 20% in federal income taxes; and
- Not have to pay tax on it if repaid within three years; or
- Elect to spread the inclusion of income over three years.
Consider a loan. Another option is to borrow from your retirement plan. The CARES Act increased the loan maximum from $50,000 or 50% of your vested balance to $100,000 or 100% of your vested balance. This is for any money borrowed between March 27, 2020 and December 31, 2020. For individuals with existing loans, the due date for the loan repayment is suspended one year.
You can take a distribution even if you are still working. In addition, the Act relaxes the rules on in-service distributions. Normally, if you are still employed, the plan would not allow you to take a distribution from a qualified plan. Under the Act, in-service distributions up to $100,000 are permitted.
A “qualified individual” is someone (including spouse or dependent) that is diagnosed with COVID-19, or has experienced financial hardship as a result of being quarantined, furloughed, laid off, had work hours reduced or been unable to work due to lack of child care.
If you don’t need money, you don’t have to take it. The Act suspended the minimum distribution requirements for 2020. This includes distributions from most qualified retirement plans (but not nongovernmental 457(b) plans) and IRAs, including inherited IRAs.
As a reminder, the recently enacted SECURE Act changed the required beginning date from 70½ to 72, but this change only applied if you had not yet turned 70½ before 2020. So if you just turned 70½ in 2020, this rule would not apply to you since you didn’t have to start your distributions this year.
The key take-away here is that if you had already started taking your mandatory distributions or you had an inherited IRA, you don’t have to take a distribution in 2020. This gives you the chance to let your plan balance recover from the downturn in the stock market before you take any money out.
If you already took your required distribution from your IRA in 2020, you have 60 days from the date of the distribution to put it back and not be taxed on it. Another option would be to convert it to a ROTH IRA.
You can still contribute to an IRA. The CARES Act also extended the time for which you can contribute to your IRA. Since the tax return filing deadline was extended until July 15, 2020, the time for making your IRA contribution was also extended to that date.
The bottom line is that the COVID-19 pandemic may have altered your tax picture for 2020. For example, you may be in a lower tax bracket due to a reduction in your wages or your portfolio may not generate the capital gains you have seen in recent years. Some questions you may have include: If you take an early distribution would it be best to repay it or spread the income over three years? If you don’t take a required distribution, what is the tax impact or how much can you take and still be in a lower tax bracket, and what does this do to your quarterly payments? Or, is it even worth making a traditional IRA contribution or are you be eligible for a ROTH? In all cases, you should speak with your tax professional to discuss the tax implications of any decision you make regarding your retirement plans.