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Retirement Plan Access Rules
The CARES Act is generally geared towards providing relief for businesses and the suddenly unemployed, but it does contain provisions that change the rules for retirement plans in 2020. Please read carefully to make sure you know how these changes could affect your retirement plan this year.
Required minimum distributions (RMDs) from IRAs, 401(k)s, 403(b)s and other retirement plans have been suspended for 2020. The RMD waiver applies to those who reached age 70.5 years of age and who would have been required to take their first RMD by April 1 of 2020. This waiver also includes RMDs from inherited IRAs. This waiver works in conjunction with the recently enacted SECURE Act which moved the commencement of RMDS for those who had not reached age 70.5 before January 1, 2020. For those people, the commencement age for RMDs has been extended to age 72. This effectively pushes the initial RMD back several years for those who turn 70.5 in 2020.
If you already took your 2020 RMD, there are some limited options. One option is the 60-day IRA rollover rule. If you took your 2020 RMD within the past 60 days, you could redeposit it back into the IRA with no tax consequence. If more than 60 days have passed, you have missed out on this option (unless the government changes the rules to accommodate these situations). It’s also important to note that the 60-day rule can only be used once within a 12 month period. If you took an RMD from an inherited IRA you will be unable to take advantage of this this rule change because it doesn’t apply to inherited IRAs. The 60-day rule is complex. Make sure you consult with a knowledgeable tax or financial adviser or with your IRA custodian to make sure that you correctly execute the transaction.
The CARES Act allows individuals to withdraw up to a total of $100,000 from retirement accounts such as 401(k)s or IRAs without having to pay a 10% penalty, if they are under age 59.5. To qualify, you need to fall into one of two categories:
- You, your spouse or a dependent have been diagnosed with COVID-19.
- You have suffered financial consequences as a result of the pandemic. These include reduced income from being quarantined or furloughed, having your hours reduced, being unable to work due to childcare issues.
The 10% penalty waiver is retroactive to January 1, 2020 so, if you took a distribution from your retirement plan earlier this year that was subject to the penalty, that distribution now qualifies for the waiver. Although the distribution is still subject to taxes, the tax liability can now be spread out over the next three years. You will also be able to “re-contribute” the money back into the account over the next three years to avoid some or all of the taxes. These re-contributions not subject to the normal plan contribution limits. Not all retirement plans will allow these COVID-19 withdrawals so, be sure to check with your plan administrator before undertaking this course of action.
The CARES 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 lessor of $100,000 or 100% of the participant’s balance. These limits extend through the end of 2020.
Anyone with an outstanding loan balance from their plan and whose repayment is due between March 27, 2020, and December 31, 2020, can extend the repayment period for one year. Retirement plan sponsors can adopt these new rules for loans and hardship withdrawals immediately without doing a formal amendment to their plan. The sponsor will eventually need to make a formal amendment, but the CARES Act pushes out the date to do this.
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