CARES Act Retirement Provisions
The Bottom Line:
CARES Act relaxes retirement distribution rules
Qualified individuals have more flexibility
Always check with plan sponsors and your accountant!
The CARES Act & Retirement:
COVID-19 has and will continue to impact our finances. Workers have suffered lay-offs, furloughs, hour reductions, and time missed due to serious illness.
To help, the federal government passed the CARES Act last March—providing support to hospitals, expanding unemployment, creating the Paycheck Protection Program, sending stimulus checks to many, and incentivizing charitable contribution.
Additionally, the CARES Act adjusted rules for early distributions from some retirement accounts to help give workers more flexibility in a difficult time. If you need $$ and have a 401(k) or IRA, these changes may help!
What’s different?
The big change is an expansion of distribution options and favorable tax treatments on withdrawals from some retirement accounts.
In regular wordstalkspeaking please?
This means a break on that #YIKES federal tax uppercut to the wallet you’d normally take for withdrawing retirement funds early.
These changes may apply to 401(k), 403(b), 457(b)s, and Traditional IRA plans for qualified individuals. You may qualify if:
You were diagnosed with COVID-19
Your spouse/dependent was diagnosed with COVID-19
Or if, because of COVID-19 you, your spouse, or a “member of your household” (someone who shares your principal residence):
Experienced “adverse financial consequences” as a result of quarantine, furlough, lay-off, or hour/pay reduction
Couldn’t work due to lack of childcare
Had a job offer rescinded or job start delayed
Closed or reduced hours of a business you or these persons own
The qualified could receive up to a $100,000.00 distribution from all of their retirement accounts combined.
:::Friendly neighborhood accounting Stop Sign:::
Always check with your plan sponsor before you request an early distribution!
Some of the benefits: No 10% penalty, 20% withholding waived, borrowing limit increased & reporting/repayment flexibility
If you qualify, you would avoid the 10% penalty tax you would normally incur on distributions before age 59.5. (And you won’t feel left out on a leaky sad tax boat if you’re 59.4998 anymore.)
The 20% mandatory withholding that previously applied to early distributions from 401(k)s is waived. Reporting the income from withdrawal can be spread out over the next 3yrs — so if you take $15,000 from an eligible account, you might report $5,000 on your 2020 taxes, $5,000 in 2021, and the final $5,000 in 2022.
If you repay a covid-related distribution that is eligible for tax-free rollover treatment into the retirement account within 3yrs, no taxes are owed on the distribution. So recontributing that $15,000 before 2022, you won’t have to pay income taxes on your 2022 taxes, and may even be able to file amended returns for your repayment from ’20 & ’21.
Re a 401(k), 403(b), or 457 plan, borrowing limit increases to $100,000 or 100% of your “vested interest,” whichever is less. And while you will have the standard five years to repay that money, the clock starts ticking in 2021- not 2020 (interest still accrues in 2020 however).
My Brain, It Hurts. Review please?
Qualified individuals (people who were physically or financially impacted because of COVID-19) may be eligible for favorable tax treatment and eased restrictions on taking early distributions or loans from their retirement accounts
If you qualify, you may be able to:
Get a tax break on the automatic 10% penalty on early distributions
Stretch the reporting of the distribution over three years
Repay an eligible distribution in three years to avoid tax implications or amend taxes already paid
If you want to take out a loan, you:
1. Can take up to 100% of your vested interest or $100,000 whichever is less
2. Have five years to repay, starting in 2021
To take advantage of these changes, you must:
Make sure your retirement plan is following these guidelines. Some employee sponsored plans don’t offer loans, for instance!
Check with an accountant re potential tax implications. The IRS hasn’t, as of now, released guidance on how to prove you were impacted. It’s up to the IRS if you qualify and you may take a tax hit if you don’t. Make sure you’re ready for every possibility.
Of course, there are more things to consider (i.e. What if you lose/leave your job after taking out a loan from your 401(k)?). However, in the right circumstance, these provisions could help those struggling financially.
Play it smart if you think you might qualify — talk to your accountant, make a plan, and you’ll be sure to have a good day!