The $2 trillion Coronavirus Aid, Relief and Economic Security (CARES) Act, signed by the President last Friday, provides bold stimulus measures to ease the pain and disruption of the COVID-19 pandemic.
We’ve summarized below the key provisions affecting your retirement accounts. We stand by ready to answer your questions or explore which measures you should deploy to optimize your financial plan.
Required Minimum Distributions (RMDs) Waived For 2020
To allow more time for your retirement balances to recover, Congress has waived Required Minimum Distributions (RMDs) for 401(k), 403(b), and 457(b) plans as well as Inherited and regular IRAs for calendar year 2020.
Congress had previously waived RMDs in 2009 after the Great Recession to help consumers avoid unnecessary taxes and allow retirement accounts time to rebound.
The Verdict: Thumbs up. If you don’t need to withdraw retirement funds to meet your budget, this measure will save you taxes in 2020 and give your retirement balances an extra boost.
Extra Time To Contribute To IRAs And Other Accounts
The normal deadline to contribute to your Traditional or Roth IRA for last year is April 15, 2020.
This year, the deadline is extended to July 15 (you also have until July 15 to pay most taxes due).
If you haven’t fully contributed to your IRA or other retirement accounts for last year (2019), you’ll have until July 15 to finish (deadlines may be extended even further for other business retirement plans).
If you have extra money and want to take advantage of the market pullback, you can start funding your 2020 retirement accounts as well.
The Verdict: Thumbs up. This extension will help many taxpayers. Not only does it give them more time to gather the funds they want to contribute, but it ensures we are able to get contributions in before the deadline, in the event of mail or other delays caused by the COVID-19 lockdowns. Please remember to route contributions through our office so we can ensure your contribution is applied to the correct tax year and account.
Penalty-Free Hardship Withdrawals Up To $100,000
The CARES Act has special provisions to help you meet unexpected bills through retirement plan withdrawals.
You can make hardship distributions of up to $100,000 from your retirement accounts in 2020 without paying the 10% early withdrawal penalty that would normally apply to people under age 59½. You are still required to pay income taxes on your withdrawals, but the tax can be spread over 3 years. Even better, you can replace the money over 3 years, in addition to making your normal retirement contributions. The no-penalty withdrawal is available to people who suffer a financial setback due to the coronavirus, under the following conditions:
- You, your spouse or a dependent is diagnosed with COVID-19
- You experience adverse financial consequences as a result of being quarantined, furloughed, laid off, or having work hours reduced; or you cannot work due to lack of child care or closures related to the coronavirus pandemic.
The Verdict: Mixed. Withdrawing money from retirement accounts is not to be taken lightly, and should be considered only as a measure of last resort. Retirement money is set aside for a purpose, and grows tax-deferred until needed for your retirement. The median 401k/IRA balance for those nearing retirement (those ages 55-64) is only $135,000, says Alicia Munnell, director at the Center for Retirement Research at Boston College. That’s not enough to fund the lifestyle most people want to maintain in retirement, so early withdrawals should be avoided except in the most dire situations.
“401ks are becoming the Swiss cheese of retirement accounts,” echoes Steve Parrish, Co-Director of the Center for Retirement Income at the American College of Financial Services. Every time the government allows people a new way to access 401(k) funds before retirement, he says, it inevitably leads to more holes in their retirement plans.