CARES Act Summary – Important Changes to Retirement Plans
Financial Planner, MBE Wealth Management
*This post has been updated to included new information about retirement plan withdrawals.
The Required Minimum Distribution Is Waived For 2020
Much like the 2008 legislation stemming from the financial crisis, IRAs (including SEP and SIMPLE IRAs) will not be required to withdraw their RMD for 2020. This also applies to 401(k) plans, 403(b) plans, and 457(b) plans as well as Inherited IRAs. Additionally, the use of the Qualified Charitable Distribution will still be allowed so if you are someone who had intended on using your 2020 RMD toward a qualified charity, you can still do so and the amount donated will still receive the preferential QCD tax treatment up to the maximum amount.
The Prior-Year RMD Strategy Can Also Be Waived
In addition to the RMD waiver for 2020, the waiver provision can also be used by those that elected the deferral strategy of their first RMD. In other words, those who turned 70 ½ in 2019 and delayed their RMD, expecting to pay by April 1st of 2020, will not need to take the 2019 RMD, nor will they have to take their 2020 RMD.
The Non-Designated Beneficiary 5-Year Rule Becomes A 6-Year Rule
Typically, when a Non-Designated Beneficiary inherits an IRA before the decedent’s required beginning date (RBD), they are required to have all funds removed within 5 years of the descendant’s date of death. 2020 is now considered ‘disregarded’ and will not count as one of the five years, effectively giving us a 6-Year Rule.
The 10-Year Rule From The New SECURE ACT Is Not Affected
Remember the SECURE Act that passed a few months ago? It effectively created a new category of beneficiary known as the Non-Eligible Designated Beneficiary and did away with their ability to stretch the required distributions over their lifetime and instead required all funds removed from the inherited IRA within 10 years. Unlike the 5-Year Rule that is disregarding 2020, the 10-Year Rule does not change. Remember, however, the 10-Year Rule doesn’t start until the year after the year of death. And since 2020 is the first year the provision is in effect, it doesn’t count as year 1 anyway which is probably why they didn’t change the legislation to waive 2020.
10% Penalty On Early Distributions From IRAs Waived For New “Coronavirus-Related Distribution”
The CARES Act includes what will be known as the new “Coronavirus-Related Distribution”. These are distributions of up to $100,000, made from IRAs, employer-sponsored retirement plans, or a combination of both, which are made in 2020 by an individual who has been impacted by the Coronavirus. If taken by someone under the age of 59 ½, the 10% early withdrawal penalty is waived. While income taxes must still be paid, the tax liability will be allowed to be repaid over three years! To be eligible, you must be diagnosed with COVID-19, or have a spouse or dependent with the diagnosis, or experience ‘adverse financial consequences’ related to COVID-19. Additionally, you have 3 years from the day you withdraw funds to roll some or all of them back into your IRA or other qualified accounts to avoid owing the taxes pro-rata.
Withdrawals From Qualified Plans-Loans And The New COVID-19 Withdrawal
The CARES Act also has created more flexibility when it comes to borrowing funds from 401(k) or similar qualified plans. The current maximum amount of plan loan has been doubled from 50k up to 100k. Plans will also now be allowed loans up to the present value of the participant’s account whereas previous rules capped it at 50% of the value. Additionally, loan payments due to taking a loan prior to 12/31/2020 can be delayed for up to 1 year. As mentioned in the previous section, if you would like to take a withdrawal instead of a loan, you may now qualify under the CARES Act. Participants affected by COVID-19 can withdraw up to 100k of account value and avoid the 10% penalty. In order to take advantage of this, your plan must adopt this provision (typically through a simple opt-in form) at which point the withdrawal option should be readily available. Ask your plan provider or financial adviser if this option is available through your plan.
*The information provided is for educational and informational purposes only and does not constitute investment advice and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell a security. It does not take into account any investor’s particular investment objectives, strategies, tax status or investment horizon. You should consult your financial advisor, attorney, or tax advisor. For additional information and disclosures, please visit our website at www.mbewealth.com.