April 28, 2020: Retirement Account Rules Change in Response to Coronavirus

Ann Miller |

The Coronavirus Aid, Relief, and Economic Security Act, or ‘CARES’ allows retirement account owners to take withdrawals for emergency costs related to the coronavirus pandemic and partially delays the tax consequences. Workers will also be able to initiate bigger 401(k) loans and get a slightly longer repayment period for existing loans. Retirees can delay taking required minimum distributions from their depleted retirement accounts in 2020.

Ways that the 401(k) or IRA are able to be used for coronavirus costs:

  • Retirement account participants may withdraw up to $100,000 for coronavirus expenses.
  • The income tax due on a retirement account withdrawal can be paid over three years.
  • Savers have three years to put withdrawn funds back in a retirement account.
  • Retirees can delay taking required minimum distributions from retirement accounts in 2020.
  • 401(k) loan limits increase to 100% of your vested account balance up to $100,000.
  • The 2019 IRA contribution deadline has been extended to July 15, 2020.

Withdraw Up to $100,000 From a 401(k) or IRA for Coronavirus Expenses

Retirement savers who have been negatively impacted by the coronavirus crisis can now withdraw up to $100,000 from a 401(k), IRA or similar type of retirement account until Dec. 31, 2020, without being charged the usual 10% early withdrawal penalty. Those who are diagnosed with COVID-19 by a test approved by the Centers for Disease Control and Prevention or who have a spouse or dependent who tests positive for the coronavirus can take emergency retirement account withdrawals. Those who experience adverse financial consequences as a result of being quarantined, furloughed, laid off, reduced work hours or being unable to work because of a lack of childcare due to the coronavirus pandemic are also eligible for the emergency withdrawals.

Income tax must be paid on withdrawals from traditional retirement accounts and may be drawing from an account that has recently lost value without giving it time to recover. It would be of more benefit to find other ways to get by before you borrow from your retirement account. You may be withdrawing funds at a reduced share price, but your money could be 'out of the market' on those critical days during the market recovery," Find ways to diminish expenses, call your creditors about options and employ any other assets to get through this current crisis before accessing retirement assets.

Pay the Income Tax Due on Retirement Account Withdrawals Over Three Years

Income tax will be charged on emergency retirement account withdrawals from tax-deferred accounts. However, the CARES Act allows you to spread the income tax bill over a three-year period, beginning in the year the distribution is taken.

You Can Put Withdrawn Funds Back in a Retirement Account

Retirement accounts are subject to annual contribution limits, which can make it difficult to rebuild your retirement account balance after you have taken an early withdrawal. However, those who take coronavirus emergency withdrawals can put the money back in a retirement account at any time during the three years after the distribution.

Delay Taking Required Minimum Distributions from Retirement Accounts

Retirees age 72 and older are generally required to take withdrawals from their retirement accounts each year. If you do not need to withdraw money from your retirement account, you may can skip their 2020 required minimum distribution. Retirees can now avoid taking withdrawals from depleted retirement accounts and give the stock market time to recover before resuming distributions.

Again, if there is another way to access funds, this would be a better option than accessing retirement funds.

401(k) Loan Limits Increase

Participants in 401(k) plans are generally eligible to borrow as much as 50% of their vested account balance up to a maximum of $50,000. The CARES Act allows retirement savers to borrow 100% of their vested account balance up to a maximum of $100,000 during the 180-day period after the law is implemented.

Loans from 401(k)’s have to be repaid, most of them within five years, so for example, if you take $100,000 from your 401(k) as a loan, you will need to repay approximately $20,000 per year. That could present a cash flow strain in coming years. 401(k) loans also charge interest and fees, and if you lose or leave your job, the loan could become due sooner than expected. Those with outstanding 401(k) loans that are due before Dec. 31, 2020, can delay repayments for one year.

Extra Time to Make 2019 IRA Contributions

IRA contributions must be made by the due date for filing your tax return each year. The due date for filing federal income tax returns has been postponed until July, so the deadline for making IRA contributions for tax year 2019 has been extended to July 15, 2020.

However, try to determine what your cash flow will be in until then in terms of employment and cash flow.

If you are in the 24% tax bracket and contribute $6,000 to an IRA for 2019, you can reduce your federal income tax bill by $1,440. A new IRA contribution may be automatically applied to tax year 2020, unless you specify that it should be documented as a 2019 contribution.

If you took an early withdrawal from a 401(k) or IRA before age 59 1/2 in 2019, you were probably charged a 10% early withdrawal penalty. You can now delay the payment of a 2019 early withdrawal penalty until July 15, 2020, the new tax filing deadline.

Please feel free to call with any questions and we wish that you and your family stay safe and well.