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The CARES Act Impact on Retirement Plans

The CARES Act (referred to hereafter as the "Act") is geared not only towards providing relief for businesses, but also towards changing rules about retirement plans for 2020. We felt a summary of the main points would be helpful to you as you navigate your own personal challenges in the COVID-19 world. Thank you to Marina Karpoukhina, Senior Tax Manager at our sister company WT Tax Accounting, for her assistance compiling and validating this information.

Required Minimum Distributions

Required minimum distributions (RMDs) from IRAs, 401(k)s, 403(b)s and other retirement plans have been suspended for 2020. This waiver also includes RMDs from beneficiary/inherited IRAs (although the rollover extension described below does not apply).

To be clear, you are still permitted to take retirement distributions in 2020 (if that works better for your tax situation), there is simply no Required Minimum Distribution this year.

Those who use some or all of their RMD to make contributions to a charity as a qualified charitable distribution (QCD) can continue to do this. The amount of the QCD will be excluded from your income as in past years.

While the Act itself does not specifically address what happens for those who may already have taken an RMD for 2020, new IRS Notice 2020-23 states that as long as you took the distribution on or after February 1, 2020, you have an extension until July 15, 2020 to reverse your earlier decision by completing a 60-day rollover. (The law still only permits one IRA-to-IRA rollover in a 12-month period, so this would have to be your first rollover in that time period to qualify.) If you find yourself in this circumstance, watch that July 15th extension date closely as there is no way to undo the RMD afterward. We expect additional guidance on this and other questions on the Act over time.

Retirement Account Distributions

The Act allows individuals to withdraw up to $100,000 from retirement accounts such as a 401(k) or an IRA account in total without having to pay a 10% penalty if they are under age 59½.

To qualify for this relief you need to fall into one of two categories.

  1. You, your spouse or a dependent is diagnosed with COVID-19.

  2. You have suffered financial consequences as a result of the pandemic and associated restrictions. These might include: reduced income from being quarantined or furloughed, having your hours reduced, being unable to work due to childcare or other issues beyond your control, or even being a small business owner whose enterprise was negatively impacted.
This waiver of the 10% penalty is retroactive to January 1, 2020, so if you have already taken a distribution from your retirement plan earlier this year, that distribution will now qualify for this waiver.

While the distribution will still be subject to taxes, as with any retirement account distribution, this part of the Act provides three important relief provisions:

  1. The tax liability of the distribution can be spread out over the next three years,

  2. Any repayment will not count against the contribution limit for that year, and

  3. You will be eligible for a tax refund on withdrawn amounts if they are repaid within the three-year window.
Not all retirement plans will allow these COVID-19 withdrawals, so check with your plan administrator if you have an employer-sponsored retirement plan (e.g., a 401(k)) to see if your plan will be offering this option.

401(k) Loans

The Act doubles the maximum amount that can be borrowed from a 401(k) from the lesser of $50,000 or 50% of the plan participant's account balance to the lesser of $100,000 or 100% of the participant's balance. The loan must be taken by September 23rd (180 days from the Law's enactment on March 27th) and no repayment is required for the first year.

In order to qualify for the special loan provision, you must self-certify some sort of hardship from the COVID-19 crisis. The coverage is broad and would apply in many cases. Again, please check with your plan administrator as each might treat this differently.

To Consider

Everyone's situation is different; however, here are a few key takeaways from above:

  • RMD Waiver: There does not appear to be a meaningful downside to the RMD waiver. Skipping your RMD in 2020 means that you don't reduce your account balance any more than the recent decline in the stock market already has. You also will not owe any taxes on an RMD for 2020.

    Regular Distributions: If you rely on your retirement account to fund your living expenses, you will still be allowed take a regular distribution. Any distribution taken will reduce your account balance, potentially reducing your 2021 RMD.

  • Special Early Distribution vs. Loans From Your Retirement Account: Taking the special early distribution from your retirement account is a permanent reduction of your account balance if you are unable to recontribute the funds later.

    A 401(k) loan may be a better alternative; however, it is important to remember that a loan can become a taxable distribution if you leave your current company before repaying the loan.
If you would like to personally investigate any of these topics further, we recommend searching for "CARES Act" on any of the following sources:

Please reach out to discuss any of the above information as it relates to your portfolio and family situation. I would be happy to help you, and your tax professional, review the short-term relief options available under the Act and be sure you are considering all potential remedies during this tough economic period. We hope you are healthy, safe and happy.


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At WT Wealth Management we strongly suggest having a personal financial plan in place before making any investment decisions including understanding your personal risk tolerance and having clearly outlined investment objectives.

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