How Does the CARES Act Impact My 401(k) In 2020?

The $2.2 trillion CARES Act signed into law March 27, 2020, did more than provide financial relief to individuals, families, and small businesses. It also contains provisions that may impact your 401(k) in 2020.

Not only does the bill include changes to both defined contribution and defined benefit retirement plans, but it also changes the rules on early withdrawal and 401(k) loans.

Keep reading to find out how the CARES Act may affect your retirement plan this year.

No Required Minimum Distributions (RMDs) for 2020

 

The CARES Act effectively suspends RMDs for 2020 from 401(k)s, 403(b)s, 457 plans, traditional IRAs, SERP-IRAs, Simple IRAs, and Roth IRAs inherited in 2020.  

Required minimum distributions are IRS-mandated withdrawals from retirement accounts listed above. The IRS requires these withdrawals to ensure that taxes are paid on amounts that were contributed on a pretax basis, plus any tax-deferred earnings in those accounts over the years. 

While some people live off their distributions, this bill now provides you the option to choose if you want to take out money this year.

The RMD waiver is for those who reached age 70½ in 2019, and who would be required to take their first RMD by April 1, 2020. Don’t forget, the SECURE Act, which passed late December 2019, raised the RMDs from 401(k) plans and traditional IRAs from age 70½ to age 72 for those who turned 70½ in 2020. So this bill extends the initial RMD back a few years for this group. 

The CARES Act also impacts 2019 RMDs for those with a required beginning date of April 1, 2020. Any 2019 RMD amount remaining and not withdrawn by January 1, 2020, is waived.

If you already took an RMD for 2020, you have a few options available to you. While there is no provisions in the bill for you to put back a distribution already taken earlier this year, if you took an RMD from a 401(k) or an IRA in the last 60 days, you can do a 60-day rollover to an IRA so it’s not treated as a taxable distribution in 2020. If it’s been more than 60 days, there is nothing you can do about it. 

Also, if you took an RMD from an inherited IRA, you will not be able to invoke the 60-day rule, as it does not apply to inherited IRAs. 

If you don’t need your RMD this year and you have it set up to automatically withdraw, we recommend calling an advisor or your plan provider and suspending the RMD. This way you can let your account balance grow and avoid paying taxes on the withdrawal amount. 

Retirement Account Distributions Relief

 

The CARES Act allows individuals aged 59½ and under who are impacted by the COVID-19 crisis to withdraw up to $100,000 from their 401(k), 403(b), 457 plans, or IRA without having to pay a 10% penalty. 

The retirement account distribution is still subject to taxes; however, the tax liability can be spread out over 3 years or you can repay the distribution and re-contribute back to the account over the next 3 years to avoid some or all taxes. 

If you expect to report a lower income this year, the amount can be treated as taxable income in 2020.  

To further provide financial relief and access to cash, the 10% penalty waiver is retroactive to January 1, 2020. If you took a distribution from your IRA or 401(k) earlier this year–and it was subject to penalty–you may qualify for this waiver. 

To qualify for retirement account distribution relief, you must meet one of these two requirements: 

1. You have suffered as a result of the health crisis–due to being laid off, furloughed, quarantined, unable to work due to childcare issues, or other issues beyond your control.
2. You, your spouse, or a dependent is diagnosed with COIVD-19 by a CDC-approved test. 

We recommend you check with HR or your plan administrator to ensure your retirement plan offers this option. All plans might not allow for COVID-19 related distributions. 

401(k) Loans

 

The CARES act doubles the borrowing limit on your 401(k) from $50,000, or 50% of the vested account balance, up to $100,000, or 100% of your vested account balance. 

This provision allows qualified participants to take a loan from a qualified employer plan within 180 days from the bill’s date of enactment, March 27, 2020.

Technically, you are supposed to show hardship as a result of COVID-19, but this is a self-certification process, so you might not need to prove much. Be aware that each plan administrator will treat this differently and some may require more documentation than others. 

While it’s advisable not to borrow from your 401(k)–and instead look for other options for your short-term cash needs–we understand you need to do what you need to do right now. 

Do keep in mind that a 401(k) loan may become a taxable distribution if you leave the company or if you are let go before paying it back. 

We recommend you speak with your financial advisor and accountant before making this move. 

Current 401(k) Loan Repayment Relief

 

If you have 401(k) loan repayments due between March 27, 2020, and December 31, 2020, you may delay your repayment for one year without penalty. 

However, interest will continue to accrue should you delay repayments. Subsequent repayments will be adjusted to reflect the interest that accrues during the delay in payments. 

We Are Here to Help

 

As the COVID-19 situation continues to evolve, so may your financial situation. Before you make a move, we recommend you speak with a third-party expert who can help you make the best decisions possible–for right now and the future. 

Don’t wait to speak to an expert about your situation. 

Remember, this is your money and your financial future we’re talking about. 

401(k) Maneuver is committed to providing you resources to help you make the best possible decisions about your financial and retirement future. 

Check out our most recent COVID-19 related posts: 

• Should I Stop or Increase My 401(k) Contributions Right Now? 
• Important IRS Changes: Tax Relief for Americans during the Pandemic 
• Stimulus Checks: How Much Americans Can Expect to Get
• Families First Coronavirus Response Act (the FACTS)

401(k) Maneuver is dedicated to helping you learn AND correct 401(k) mistakes that may lead to sleepless nights, feelings of hopelessness about retirement, and frustration on where to turn for reliable help.

We invite you to check out our no-cost 401(k) Masterclass Videos.

In just 13 minutes, you’ll discover 3 strategies that may…

• Improve Your Account Performance – So you can have more money, creating a fulfilling retirement.
• Manage Risk to Minimize Losses during the Bad Markets – So you can keep more of what you have made.
• Reduce Fees That Harm Account Performance – So more of your investment grows for your retirement.

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