The CARES Act: Retirement Accounts
The Coronavirus Aid, Relief, and Economic Security (CARES) Act, which became law on March 27, 2020 as part of the federal government’s response to the COVID-19 pandemic, may affect your retirement account in a number of specific ways.
If you participate in your employer’s defined contribution plan, such as a 401(k), 403(b), 457, or TSP, or if you have one or more individual retirement accounts (IRAs), you could take advantage of a number of changes the CARES Act put in place for 2020.
A major CARES Act provision suspends Required Minimum Distributions for 2020—these are the minimum amounts that a retirement plan account owner must withdraw annually. Though account holders aren’t required to make withdrawals, you’re still welcome to take distributions.
If you are the beneficiary of an inherited IRA, you're also eligible to skip the RMDs that would otherwise be required. That’s the case whether it is a traditional tax-deferred IRA or a Roth IRA. If you are the beneficiary of a 401(k), 403(b), or similar plan, RMDs are also suspended. But the rules are a little more complicated—you may want to seek professional advice, especially if you inherit during 2020.
The deadline for making your 2019 contribution to an IRA, which normally would have been April 15, 2020, has been extended until July 15, 2020. That is also the date on which 2019 income taxes must be filed.
If your employer’s defined contribution plan permits hardship withdrawals, the CARES Act relaxes several existing federal requirements for qualifying plan participants. (You can learn more about hardship withdrawals here.) The maximum you are eligible to withdraw from a qualified plan in 2020 is $100,000 or 100% of your vested account balance, whichever is less. Before the CARES Act, those limits were $50,000 or 50% of accumulated assets.
If you take a hardship distribution from your plan, you can repay the amounts you had taken out back into the plan within three years, starting the day after you received the money. If you replace the amount of your withdrawal by the end of the third year, you will be eligible to recover federal and state income taxes you may have paid if you file corrected returns. If you don’t repay and do owe income taxes, you can pay those amounts over a three-year period.
If your employer plan includes a loan provision, the CARES Act allows qualifying participants to borrow up to $100,000 or 100% of your vested account balance, up from $50,000 or 50%. To be eligible, you must take the loan within 180 days of the enactment of the CARES Act, or by September 23, 2020.
If you have an existing employer plan loan and repayment is due between March 27 and December 31, 2020, you can extend your repayment period for one year, but your employer must agree to the extension. But if you leave your job for any reason, the full outstanding balance becomes due. If you don’t repay in full, any unpaid amount is taxable.
While it is easier as a result of the CARES Act to access your retirement savings, there are drawbacks to taking loans and hardship withdrawals. Among the most important is that you may endanger your long-term financial security. Be wary and only explore these options if absolutely necessary.
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