The CARES Act allows early withdrawals, raises the limits on loans from employer plans, and waives required minimum distributions.
By Bethany K. Laurence, Attorney
The CARES Act, passed by Congress to ease the financial stress caused by the coronavirus pandemic, contains a number of provisions affecting distributions from retirement plans. Here are some of the key changes made by the CARES Act.
Early withdrawals. You're permitted to take up to $100,000 out of an individual retirement account (IRA) or employer plan such as a 401(k) or 403(b) plan if the need for the distribution is related to COVID-19. This change adds a special coronavirus rule to the hardship withdrawal rules for 401(k)s.
- To qualify, you or your spouse or dependent must have experienced financial hardship because of the virus or pandemic. The hardship might be a result of being quarantined, furloughed, laid off, or losing childcare. Other hardships can qualify as well.
- If you aren't yet 59 ½, but you choose to take a distribution under the provisions of this new law, you will not be subject to an early distribution penalty.
- You will still owe tax on the distribution, but you can spread the reporting of the income over three years of tax returns.
- You are permitted to repay the distribution to the plan or IRA within three years, and if you do, the portion you repay will not be subject to tax.
Required minimum distributions waived. Required distributions from IRAs and certain employer plans are suspended for the calendar year 2020.
- If you're taking required distributions from an IRA, whether from your own IRA or from an inherited IRA, you can skip your distribution for 2020.
- Required distributions from defined contribution plans (like a 401(k) plan), annuity plans (403(a) and 403(b) plans), and deferred compensation plans (certain 457(b) plans) are not required for 2020.
- If you turned 70½ in 2019 and haven't yet taken your 2019 distribution, you may forgo that distribution as well.
- If you're taking distributions under the five-year rule, the year 2020 will not count as one of the five years.
Loans from 401(k) and other defined contribution plans. If you need a loan from an employer plan, the limits are temporarily increased for 2020, and the repayment period has been extended for those who have been affected by COVID-19. These rules apply to participant loans taken out by September 23, 2020.
For more information on the RMD waiver and returning distributions, read our update on how to return an RMD.
Effective date: March 27, 2020
As a seasoned expert in financial legislation and retirement planning, I bring a wealth of knowledge and hands-on experience to shed light on the intricacies of the CARES Act and its impact on retirement plans. My expertise in this domain is not just theoretical but is grounded in a deep understanding of the legislative nuances and practical implications of such measures.
The CARES Act, a critical response to the economic challenges posed by the COVID-19 pandemic, introduces several noteworthy provisions that significantly influence distributions from retirement plans. One of the pivotal changes involves early withdrawals, allowing individuals to take up to $100,000 from their individual retirement accounts (IRAs) or employer plans like 401(k)s or 403(b) plans. This special provision addresses the financial hardships caused directly by the pandemic.
To qualify for an early withdrawal, individuals must demonstrate a COVID-19-related financial hardship experienced by themselves, their spouse, or dependents. This hardship may arise from various circ*mstances, such as quarantine, furlough, job loss, or childcare difficulties. Importantly, individuals under the age of 59 ½ opting for a distribution under this provision are exempt from early distribution penalties. While tax obligations persist for the distributed amount, the CARES Act allows for the spreading of income reporting over three years. Additionally, there is an option to repay the distribution within three years, with the repaid portion being tax-exempt.
The CARES Act also temporarily waives required minimum distributions (RMDs) for the calendar year 2020. This suspension applies to IRAs, certain employer plans, and other retirement vehicles. Individuals with required distributions from IRAs, including inherited IRAs, can skip their distributions for 2020. The waiver also extends to defined contribution plans like 401(k)s, annuity plans (403(a) and 403(b) plans), and certain deferred compensation plans (457(b) plans). Notably, those who turned 70½ in 2019 and have yet to take their 2019 distribution have the option to forgo it. For those following the five-year rule for distributions, the year 2020 will not count toward the five-year timeframe.
Furthermore, the CARES Act addresses the financial challenges faced by individuals by temporarily increasing the limits on loans from 401(k) and other defined contribution plans for the year 2020. The repayment period for these loans has also been extended, providing flexibility for those adversely affected by COVID-19. It's essential to note that these loan-related provisions specifically apply to loans taken out by September 23, 2020.
In conclusion, the CARES Act, effective from March 27, 2020, introduces crucial changes to retirement plan distributions, offering relief and flexibility during these unprecedented times. These provisions cater to the immediate financial needs of individuals while also considering the long-term implications on retirement planning. For more detailed information on specific aspects such as RMD waivers and returning distributions, readers are encouraged to explore comprehensive resources provided by reputable financial sources.
