What Does the CARES Act Mean for Retirement Accounts
On March 27, 2020, the President signed into law the Coronavirus Aid, Relief and Economic Security Act, better known as the ‘CARES Act,’ which is the largest economic bill signed into law in U.S. history. The CARES Act, as the name implies, is designed to ‘care’ for businesses and individuals who are financially struggling by the widespread, forced shutdown of many businesses due to the current COVID-19 pandemic. While much of the CARES Act focuses on relief for small businesses and the delivery of stimulus checks to qualifying individuals and families, there are several relief provisions contained within the law that focus on retirement accounts that may affect many investors. Let’s explore several of these changes:
I: Suspension of Required Minimum Distributions (‘RMD’): Anyone with an RMD due in 2020 from either an IRA or a company plan like a 401(k) or 403(b) plan does NOT have to take an RMD for 2020.
Key takeaways: Because RMDs are calculated off account balances at the end of the prior year (12/31/19), this provision will not force retirees to take distributions at a time in which account balances may be 20 - 30% lower, resulting in withdrawing a larger percentage of one’s IRA. This will hopefully allow some time for portfolios to recover as the pandemic ends and markets/portfolios stabilize and potentially rebound.
Even though you will not be required to take an RMD in 2020, you can still take a distribution if needed for any reason, such as for income purposes. Additionally, you may want to consider taking a distribution from your IRA and converting it to a ROTH IRA. With market values low, this could be the opportunity to convert some of your IRA funds to a ROTH IRA, which will not be subjected to future RMDs, like your IRA. Keep in mind that a conversion is permanent, and taxes will be due on the amount withdrawn/converted from your IRA. We suggest speaking to your accountant to see if this strategy may benefit your individual situation.
If you are charitably minded and can afford to do so during these unprecedented times, you should consider a Qualified Charitable Distribution (QCD) from your IRA. The distribution can normally be excluded from taxable income so both the charity and the IRA owner can benefit from this strategy.
II: Suspension of 10% penalty on Pre-59 ½ IRA withdrawals: The Act waives the 10% penalty on any IRA and eligible retirement plan (e.g. 401k and 401b) withdrawals up to $100,000 for individuals who are under the age of 59 ½ and are considered ‘qualified individuals.’ Income tax will still be due but will be allowed to be paid over a three-year period.
Key takeaways: To be clear, the government is waiving just the 10% early withdrawal penalty, not the actual income tax due. ‘Qualified individuals’ are those who themselves, or a spouse/dependent, have been diagnosed with COVID-19 and/or have experienced adverse financial consequences as a result of the pandemic. Qualifications include being quarantined, furloughed from work, or unable to work because of childcare. We expect more details to emerge on defining these exact hardships and how folks may qualify.
Since you will still owe tax on any distribution, with the exception of most Roth IRA distributions, and you will be impacting your retirement savings, we suggest that you speak to your Wealth Advisor first to explore other solutions that can provide you the money you need during these difficult times while minimally impacting your retirement savings.
III: Suspension of plan loan repayment: For ‘qualified individuals,’ the maximum amount of plan (e.g. 401k) loans is increased from $50,000 to the lesser of $100,000 (reduced by other outstanding loans) or 100% of the account balance. These loans must be taken within 180 days of March 27, 2020. The due date for the repayment of the loan is delayed one year.
Key takeaways: Similar to what we outlined in Part II above, ‘qualified individuals’ are defined as individuals who have had some type of adverse consequence related to the COVID-19 pandemic. There are still details coming out related to this provision and how a participant will apply for this relief. If you are a participant within a plan (e.g. 401k), it is best to talk to your HR department and/or plan administrator for further details. Of course, your Girard Wealth Advisor can help guide you as well.
IV: Extended deadline for 2019 IRA contributions: IRA contributions for the prior year (2019) have been extended from April 15 to July 15.
Key takeaways: You now have a little more time to plan to see if making a prior year’s contribution to either an IRA or Roth IRA may be of any benefit. Given the recent market volatility, this could be a good opportunity to add to your IRA which may provide a long-term retirement benefit if your situation will allow.
These are just a few of the high-level retirement provisions contained within the CARES Act. We encourage you to reach out to your Girard Wealth Advisor to see how these changes may affect you and your financial plan and discuss the appropriate solutions accordingly. We look forward to serving you!
This article is for general informational purposes only and is not intended to provide legal, tax, accounting or financial advice. The information in this article, and any opinions expressed therein, do not constitute a recommendation or an offer to buy or sell any security or financial instrument. Viewers should consult with their financial and/or legal professionals before making any financial decisions.