The Coronavirus Aid, Relief, and Economic Security (CARES) Act and Retirement Funds - Capstone Brokerage

Like many other economic factors impacted by the coronavirus pandemic, there has been a change in the way retirement funds and plans are being executed during this time.  Previously enacted laws and restrictions regarding retirement funds have been temporarily changed to reflect the current economic circumstances.  The CARES Act includes verbiage in regard to retirement plans, how they can be distributed, and who is eligible to utilize these benefits.

Retirement Plan Withdrawals

            While these new provisions may be more laxed, they are not applicable for everyone.  To qualify for the special CARES Act distributions, you must show that either that you, a spouse, or dependent has been diagnosed with COVID-19 or that you are experiencing a financial hardship directly related to COVID-19.  Without a valid COVID-19 related reason that can be proven, the typical rules and laws apply.  And even if you do qualify, you still must confirm with your plan sponsor that they are accepting the CARES Act provisions. 

Early Distribution

            Eligible participants with tax-advantaged retirement plans, such as a 401(k), 403(b), 457, or traditional IRA accounts can take up to $100,000 from their plan during 2020 without having to pay the 10% penalty most retire plans tax for those withdrawing before the account owner is 59 ½.  Additionally, this means $100,000 per person, regardless of how many accounts they may have.  However, this does not mean there is still not tax to be paid on the amount withdrawn.  The CARES Act gives you the flexibility to repay the taxes owed on the money as income over a three-year period or all in 2020 if your regular income has diminished enough to keep you in the same tax bracket.  You also have the ability to redeposit the funds within 3 years, as opposed to the typical 60 days.

Loan Rules

            Under regular circumstances, qualified workplace retirement plans give you the ability to borrow up to $50,000 or 50% of their vested balance, whichever is less.  The CARES Act allows you to now borrow up to $100,000 or 100% of their vested balance, still whichever is less from now until September 23, 2020.  While loan repayments must still be paid within 5 years along with interest, repayments do not need to begin until 2021. 

Required Minimum Distributions (RMD)

            Prior to the CARES Act, those over the age of 70 ½ were required to take a minimum distribution from their tax-deferred retirement account every year.  However, for those that turned 70 ½ prior to or during 2019, will not be required to receive an ongoing RMD for 2020.  Additionally, beneficiaries of such accounts are also not required to receive their 2020 RMD.  If you have already taken your 2020 RMD within the last 60 days, the CARES Act will allow you to rollover the distribution and place it back in the account. 

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