COVID-19, CARES Act, and Your Retirement

Introduced on March 19, 2020, the Coronavirus Aid, Relief and Economic Security (CARES) Act was quickly signed into law. While the entire bill can be found here, this blog will focus solely on the impact the CARES Act has on retirement plan withdrawals and the ability to pay back those withdrawals. In general, the CARES Act drastically increases the flexibility of retirement plan withdrawals for the year 2020. Between the removal of the 10% early withdrawal penalty and the temporary suspension of required minimum distributions, there is likely a benefit for individuals of all ages.

The CARES Act established what is referred to as a Coronavirus related distribution (CRD or CVD). A CRD is a withdrawal made from a retirement account to cover expenses brought on by the Coronavirus. Congress intentionally left the definition of a qualifying withdrawal broad, but a few examples include: you, your spouse, or a dependent has been diagnosed with COVID-19, there has been a reduction in working hours, or an unlisted cause that the IRS agrees to. If eligible, individuals can withdraw up to $100,000 in CRDs from retirement plan accounts with three key benefits:

Benefit 1) IRA Account Refunds

All Coronavirus related distributions are eligible to be paid back to the retirement account over a three year window. This window begins on the date the distribution is made and can be deposited into the retirement account either in a one time contribution or broken up into smaller contributions over time.

Benefit 2) Spread of Taxation

All Coronavirus related distributions will be taxable over a three year window. This means that qualifying distributions are spread equally over 2020, 2021, and 2022. It's important to note that this is the default treatment for Coronavirus related withdrawals, but it is possible to claim all of the income in 2020. Talk with your advisor and accountant to chart an appropriate course for your specific needs.

Benefit 3) Early Withdrawal Penalty Exception

Withdrawals meeting requirements for a Coronavirus related distribution are no longer subject to to the 10% penalty if taken out prior to 59.5. This does not alter how each withdrawal is taxed so be sure you fully understand the impact on your taxes before taking unnecessary advantage of this change.

Combining these benefits allows individuals to take distributions from retirement accounts at any age and, as long as they meet the IRS guidelines, deposit those withdrawals back into the account over the next 3 years. This will likely lead to record numbers in tax return amendments and plenty of work for accountants, but it certainly provides relief for those who have assets tied away in retirement accounts.

One of the major benefits for individuals subject to required minimum distributions (RMDs) is the removal of this requirement for the year 2020. This applies to a wide range of retirement account types including IRA, 401(k), 403(b), 457(b). The benefit also applies to beneficiaries of retirement accounts who have elected to stretch distributions. In short, anyone subject to a RMD can skip the distribution in 2020.

While there is no requirement to take distributions in 2020, the ability to withdraw from retirement accounts is unchanged. Individuals may still take distributions and make qualified charitable distributions (QCDs). The suspension of a 2020 RMDs also offers a unique opportunity for Roth Conversions. To keep this article focused, I won't go into too much detail, but we have created this infographic for more information.

The CARES Act has an impact on virtually every owner of a retirement account. It has brought relief and unique opportunities to both those who need to access their retirement accounts and those who do not. Like with any change to regulations, be sure to consult with your advisor for the strategy that is right for you.

Joe Crowley, CFP® is an Investment Advisor at Exchange Capital Management.  The opinions expressed in this article are his own.