As a response to the expanding COVID-19 pandemic and the significant impact it is having on our economy, congress passed the Coronavirus Aid, Relief, and Economic Security (CARES) Act in late March.
Within this wide-ranging law, there are several changes to retirement plans designed to soften the blow in some ways for retirement savers and those currently drawing on savings.
Following is a list of the significant changes that impact IRA and 401(k) retirement plans.
Please work with your licensed tax counsel to determine your eligibility under this program or design an appropriate strategy in light of these changes.
The CARES Act creates a special class of retirement plan distributions for individuals impacted by the COVID-19. Distributions deemed to be Coronavirus Related Distributions (CRDs) are given special treatment. This concept is similar to relief measures granted in the past to those impacted by specific natural disasters such as floods, hurricanes or wildfires.
In order to be classified as a CRD an individual must be impacted by COVID-19 in one or more of the following ways:
- They have been diagnosed with COVID-19
- A spouse or dependent has been diagnosed with COVID-19
- They are experiencing financial difficulty as a result of being laid off, furloughed, having work hours reduced, or by being quarantined
- Are unable to work because of a loss of childcare as a result of COVID-19
- Own a business that has closed or is operating under reduced hours
- Meet other criteria as determined by the IRS
Rules Changes for Coronavirus-Related Distributions
A qualifying individual may take a CRD of up to $100,000 during the 2020 calendar year from an IRA, 401(k), or combination of accounts. The following special treatment will apply to such distributions:
|No 10 Penalty for Early Distributions||Individuals under the age of 59 ½ normally pay an additional 10% penalty for early distributions. This penalty is waived for CRD’s.|
|Mandatory Withholdings Not Required||Distributions from a 401(k) plan are normally subject to 20% mandatory withholding. This withholding requirement is waived for CRDs.|
|Can Pay Taxes over 3 Years||The tax owed for a CRD can be spread evenly in 1/3 increments over a 3-year period of 2020, 2021 & 2022. Alternately, you can choose to pay the full amount of taxes in the first year.|
|Can Repay the Plan over 3 Years||For a period of 3 years beginning on the date of a CRD, an individual may roll all or part of the distributed amount back into a qualified retirement plan.
Such rollovers may be done in one transaction or multiple transactions during the 3-year period.
The rollover of eligible CRD funds back into a qualified plan is treated as a direct rollover, and therefore not limited to a 1-per-12-month event.
If the rollover occurs after a tax return has been filed to report and pay taxes on some or all of the distribution, that year’s return will need to be amended to claim a refund of the taxed amount.
Waiver of Required Minimum Distributions for 2020
Retirement plan account holders who would normally be required to take a distribution in 2020 are exempted from doing so. This change applies broadly to Traditional IRA, SEP IRA and SIMPLE IRA plans, as well as 401(k) plans.
The suspension of Required Minimum Distributions applies to account holders, as well as to beneficiaries holding inherited accounts.
The intent of this rule change is to not force plan participants to sell investments in a down market in order to take required distributions.
401(k) Participant Loan Changes
The 401(k) participant loan program has been modified for those individuals impacted by COVID-19 as outlined above with respect to qualification for Coronavirus-Related Distributions.
During the 180-day period following the passage of the CARES Act which extends through September 23rd, 2020, a 401(k) plan participant loan may be taken in the increased amount of the lesser of $100,000 or 100% of the participant’s vested plan amount. Normal limits are the lesser of $50,000 or 50% of the vested amount.
With any currently outstanding loan balance or a new loan, payments normally due between March 27th, 2020 and December 31st, 2020 may be deferred for up to one year. Any subsequent payments are then adjusted accordingly.
With a Solo 401(k), you may not borrow more than the liquid cash balance of the plan, however. So, if your total plan value is $240,000, comprised of a $150,000 real property asset and $90,000 of cash, only that $90,000 would be available for a loan.
You can have multiple outstanding loans but may not exceed the total plan limit. Therefore, if you already have a $40,000 participant loan, the maximum new amount you could borrow would be $60,000.
Delayed Implementation of 401(k) Plan Amendments
401(k) plans normally need to formally adopt amendments prior to changing plan operational procedures. For purposes of the CARES Act related changes to 401(k) distribution and participant loan operations, employers will have until December 31st, 2022 to retroactively adopt the necessary plan amendments.
Proceed with Caution
Taking money out of your tax-sheltered retirement plan should be an option of last resort.
The relaxation of distribution and loan rules contained in the CARES act are intended to allow individual to access their retirement savings to stave off financial catastrophe. If you are experiencing financial hardship, you should look to all other available sources before tapping your retirement plan.
IMPORTANT NOTE: Safeguard Advisors cannot provide tax guidance. As such, we cannot help you to determine if you meet the qualifications for special treatment under the CARES Act, nor can we help you design the optimal strategy to utilize any features of the Act. Please consult with your licensed tax counsel for advice on such matters.
We can assist you with the paperwork and reporting mechanics of taking a distribution from your Checkbook IRA or Solo 401(k) plan if you decide to do so.