Tuesday, 12 May 2020

Congress recently passed a massive legislative package designed to give Americans and small businesses some financial relief during and after the COVID-19 crisis.

Several provisions in the law change how you can access and manage your retirement savings in 2020.

Dubbed the CARES Act, which stands for Coronavirus Aid, Relief and Economic Security Act, the law includes a range of financial assistance programs, including direct payments to qualifying taxpayers and loans to help businesses keep employees on their payrolls.

The provisions affecting retirement plans give Americans additional options for using their retirement savings to help them weather the financial storm brought on by the crisis. Learn how these provisions may affect your retirement savings.

Penalty-free withdrawals up to $100,000 from your retirement plan, even before age 59½

Prior to the law being passed, if you withdrew money from your IRA or 401(k) account before age 59½, you could possibly have to pay income taxes plus an additional 10% penalty on the money you took out. The new law allows for the penalty to be waived on withdrawals made in 2020. However, to be able to withdraw money penalty-free, one of these two requirements must be met:

  • You, your spouse, or a dependent has been diagnosed with COVID-19
  • You have suffered financially as a result of the COVID-19 crisis. This includes loss of income or other negative financial impact caused by the pandemic.

If you do withdraw funds from your retirement account under this new provision, you will probably still pay income taxes on that dollar amount. However, you have up to three years to pay these taxes. And, if you re-contribute the withdrawn funds to your retirement account in the next three years, you could avoid paying income taxes altogether.

This provision is retroactive to January 1, 2020, so if you withdrew money from your retirement account earlier in the year and meet one of the requirements described above, you could have your penalty refunded. All retirement plans are different, so check with your plan administrator and tax consultant before you decide to make a withdrawal.

Increased borrowing—up to $100,000—from your 401(k)

Before the law was passed, you could borrow up to 50% of your retirement account balance up to $50,000. Now you are able to borrow up to 50% of your account balance up to $100,000. This provision expires at the end of 2020.

Also, if you have an outstanding loan balance and the repayment is due between March 27 and December 31, 2020, you might be able to extend your repayment by one year. Again, every retirement plan is different; check with your plan's administrator to see if this is an option for you.

Suspended Required Minimum Distributions (RMDs)

Prior to the passage of the CARES Act, retirees were required to start taking taxable distributions from their retirement account when they reach the age of 72. Required Minimum Distributions, or RMDs, are calculated by the Internal Revenue Service and are based on a retiree's age and account balance at the end of the previous year.

The CARES Act, however, suspends this requirement for 2020. This offers several benefits. First, since the markets have been so volatile lately, many retirement accounts have lost value since the beginning of 2020. However, RMDs are calculated based on the value of the account at the end of 2019.

In many cases, this would require withdrawals based on a 2019 balance from accounts that could be significantly less in 2020, which could deplete accounts rapidly. What's more, having the ability to leave the money in the account for the remainder of 2020 could allow retirees to recoup of some of the losses.

This provision is not retroactive and does not allow the return any RMDs already taken in 2020. Of course, if you need the distributions to supplement your income, you can continue to take them.

Should you take advantage of these changes?

Every situation is unique, but in most cases, dipping into your retirement savings is discouraged. Retirement savings are designed to keep you financially secure after you stop working, and ideally you want to keep those all-important savings intact.

However, if you absolutely need the money now, the new law makes it easier and more affordable to access the funds. As always—and especially when it comes to your retirement savings—consulting a financial professional can help you make the best possible decisions for your situation.

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