Pandemic Impact: Options for Retirement Fund Holders

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On March 27, 2020, Congress passed the Coronavirus Aid, Relief and Economic Security Act to help United States workers and businesses deal with the impact of COVID-19. The CARES Act includes provisions designed to help younger taxpayers access money in their retirement accounts and to allow retirees to preserve the funds in their retirement accounts.

Accessing retirement funds early

The novel coronavirus and COVID-19, the disease it causes, has forced severe financial hardship for many taxpayers and their families and left them looking to savings to cover living expenses. Generally speaking, taxpayers under 59.5 years of age are subject to a 10% early withdrawal penalty if they take funds out of their IRA or qualified plan, such as a 401(k) or 403(b) plan, and don’t meet any of the exceptions to the penalty. But the CARES Act adds “coronavirus-related distributions” of up to $100,000 to the list of exceptions for 2020 that are available to both IRA holders and holders of many other qualified plans.

Taxpayers are eligible to take penalty-free coronavirus-related distributions if:

  • The taxpayer, spouse or a dependent is diagnosed with COVID-19.
  • The taxpayer or a member of the household suffers adverse financial consequences due to being quarantined, furloughed, laid off, or having hours or pay reduced due to COVID-19; being unable to work due to a COVID-19-related lack of child care; or, for a business owner, closing or reducing business hours due to COVID-19.

In addition to escaping the 10% early withdrawal penalty, coronavirus-related distributions receive tax deferral: On this additional “income,” the distribution is divided and included in federal taxable income during 2020, 2021 and 2022, unless the taxpayer chooses to have the entire distribution taxed in 2020.

As an alternative to paying taxes on a coronavirus-related distribution, taxpayers may repay the distribution at any time during the three-year period following the day after the receipt of the distribution. Any repayment will be treated as a tax-free trustee-to-trustee rollover; taxes previously paid on the distribution, in prior tax years, can be recovered by amending tax returns for those years.

Please note: When taking a coronavirus-related distribution, taxpayers should clearly indicate to their retirement custodian that the withdrawal is a coronavirus-related distribution in order to ensure proper tax treatment and reporting on both sides.

The CARES Act also offers participants in qualified plans additional loan options. Many qualified plans are likely to adopt the options that, for qualifying participants, increase the cap on total loans outstanding to the lesser of $100,000 or the participant’s entire vested balance, from the lesser of $50,000 or 50% of the participant’s vested balance. And allows participants to suspend for one year loan repayments due between March 27 and December 31, 2020. To qualify for these expanded loan options, participants must meet the same eligibility criteria as described for coronavirus-related distributions above.

Preserving funds in retirement accounts

Many taxpayers have been watching COVID-19-related volatility in the stock market. Volatility can be a particular challenge for taxpayers over 70 with IRAs or defined-contribution retirement plans such as 401(k)s or 403(b)s: These taxpayers normally must take a required minimum distribution (RMD) each year from their retirement accounts after reaching age 70.5 (age 72 for those who were under 70.5 as of December 31, 2019) or be subject to a 50% penalty on the RMD that should have been taken. Some taxpayers may prefer to not touch their retirement funds during times of market swings.

Under the CARES Act, for calendar year 2020 taxpayers will not be required to take their RMD. Those taxpayers who turned 70.5 in 2019 and elected to wait to take their first RMD until 2020 may skip both the 2019 delayed RMD and the 2020 RMD. Taxpayers receiving RMDs from beneficiary IRAs may also skip their 2020 RMDs.

The Internal Revenue Service provided relief in Notice 2020-51 for taxpayers who have already taken their 2020 RMD. As long as the RMD taken is recontributed to a retirement plan by August 31, 2020, the recontributed RMD will be considered a tax-free rollover. This rollover will be specifically exempted from the one rollover per 12-month-period rule as well as the limitations on rollovers for non-spousal beneficiaries.

To be clear, taxpayers who wish to continue to take a distribution from their retirement accounts in 2020 are free to do so – the requirement to take an RMD is waived, but taxpayers may elect to take a distribution in an amount of their choice.

The CARES Act has provided new opportunities to both access and preserve retirement funds. This can all feel quite complicated, especially if you are feeling pandemic-related stressors, so we strongly recommend that taxpayers consult their tax advisors to determine the options that best meet their individual needs and tax situations.

* This article is not a complete listing of all the details related to the tax topic and you should contact your CPA for a more detailed discussion regarding these items and how they may apply to your specific situation.

Photo: Dan Dimmock,