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Here’s How the CARES Act Enhances Your Retirement Plan Benefits

| April 09, 2020
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There are many provisions in the Coronavirus Aid, Relief, and Economic Security (CARES) Act meant to benefit you during this time. So many, in fact, that we know understanding all of it can be a bit intimidating. To help you during this time, we plan to publish a few articles to explain different aspects of the act and how it benefits you. This article explains how the CARES Act Enhances Your Retirement Plan Benefits

2019 Contribution Deadline for IRAs and HSAs Is Delayed

IRA and HSA contributions are delayed until July 15, which is the new date to file and pay 2019 federal income tax returns. The deadline to make IRA and HSA contributions has always been the same as income the tax filing date (April 15), but you are getting a bit of a reprieve to make 2019 contributions due to COVID-19. However, this allowance does not apply to 401(k) plans, so keep that in mind.

2020 Required Minimum Distributions Are Waived

This is good news, especially if taking that required minimum distribution (RMD) in the midst of COVID-19 changes your tax bracket. And, at a time when the markets are unpredictable, leaving that money in your account can be advantageous as it would give you a bit of time to recoup some of your losses.

As long as you aren’t participating in a defined benefit plan, you can take advantage of this opportunity. Specifically, this helps if you are due to take your first ever RMD by April 1 (from 2019) or RMDs for 2020 that normally don’t have to be withdrawn until December 31. The RMD waiver applies quite a few plans—IRAs (traditional, Roth, SEP, and SIMPLE) as well as inherited IRAs. And, owners of 401(k), 403(b), and governmental 457(b) plans have the option not to take their RMDs, too.

Get with your financial advisor to discuss different strategies, such as Roth conversions, that could benefit you if you decide to forgo taking your RMD. But, if you’ve already taken your RMD, you also have options. If 60 days haven’t passed since you took the distribution, you can do what’s called an indirect rollover and deposit that money into an IRA. If 60 days have passed, you have up to three years to rollover those funds into another account—penalty free. Keep in mind you must meet the COVID-19 criteria below to take advantage of this allowance. Talk to your financial advisor to make sure you qualify.

You Can Take Penalty-Free Early Distributions from IRAs and Other Retirement Plans

If you meet the criteria for coronavirus-related distributions below, you are able to take a penalty-free early distribution from your IRA or other retirement plan without penalty. The withdrawal cannot exceed $100,000 and covers distributions taken from January 1, 2020 through December 31, 2020.

In short, this provision allows:

  • In-service distributions
  • Use of distributed funds for anything, with no restrictions
  • Exemption from the 10 percent early distribution penalty
  • Elimination of the 20 percent withholding typically applied to eligible rollover distributions
  • Inclusion of the distribution in your gross income over a three-year period, which also spreads the taxes owed over that same period of time
  • The option for you to recontribute those funds within three years and be refunded on any taxes you may have paid on funds that you recontribute.

You Can Also Take Loans from Qualified Plans with Broader Provisions

The CARES Act allows you to take a loan of up to $100,000 or 100 percent of the vested account balance—whichever is less—from your qualified plan. Typically, you can only borrow the lesser of $50,000 or 50 percent of the vested balance. The date to begin borrowing more under this provision was March 27, 2020, the day the act passed. You have 180 days after March 27 to take advantage of this benefit. And, instead of having to repay the loan within five years—you get an additional year to pay it back to your plan. So, this is significant. The ability to borrow more from your qualified plan can really help you and your family if you have suffered losses due to COVID-19.

Criteria You Must Meet for Early Distribution and Special Loan Provisions

In order to enjoy penalty-free distributions or take advantage of relaxed provisions to borrow from your plan as described above, you must fall into one of the below categories:

  • You, your spouse, and/or dependent is diagnosed with COVID-19, or
  • You suffer financial hardship as a result of COVID-19

We hope this sheds light on how the CARES Act enhances your retirement plan benefits. The advantages we are being offered can help us through these tumultuous times. Every bit of assistance counts and can make an impact on your finances during the COVID-19 pandemic. Discuss the different options with your financial advisor or CPA to ensure you make the best moves for your unique situation.


This article was written for informational purposes only and should not be considered as tax, legal, or financial advice. Please seek appropriate counsel to learn more about how the elements herein affect you.

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