How The CARES Act (Coronavirus Relief Law) Helps Retirement Savers
After much wrangling and delay, Congress passed a bill and the President signed into law a $2 trillion coronavirus relief law that offers sweeping financial assistance to millions of Americans, including those who use IRA and 401(k) retirement savings plans.
Known as the CARES Act, the historic legislation marks the largest stimulus package in modern American history and comes as Federal Reserve Chairman Jerome Powell has warned that a US recession may already be underway. Portions of the act aim to alleviate financial pressure for IRA and 401(k) owners by making it easier to access retirement savings and defer required distributions.
Here are three central provisions of the coronavirus relief bill that may ease economic hardships for retirement savers:
- Suspension of Required Minimum Distributions (RMD)
Beginning at the age of 72 (or age 70½ before January 1, 2020), investors who own a traditional, SIMPLE or SEP IRA, or a 401(k) must take an annual distribution from their retirement account.
But following the stock market’s brutal sell-off in the wake of the coronavirus pandemic, many retirees’ portfolios have fallen sharply. As of December 31, the Dow Jones stood at roughly 28,462. As of March 27, it stood at 21,636 – down 24% for the year. Selling assets now, especially stocks or mutual funds, to take an RMD could result in retirement savers realizing significant losses.
In light of the sell-off, the coronavirus stimulus package provides a one-year suspension of RMDs, and it waves the penalty for not taking that distribution. Typically, investors who skip an RMD are subject to a penalty equal to 50% of the required withdrawal amount. Erasing the RMD requirement will provide portfolios with a chance to recover from sharp losses.
- Expansion of Hardship Distributions
Retirement plans have long allowed participants to take hardship distributions during times of substantial financial need. But financial hardships could soar in the wake of the pandemic. US jobless claims for the week ended March 21 rose to a record 3.28 million – quadruple the prior record, according to Bloomberg News. That figure could remain shockingly high for the next few weeks.
Given this, the CARES Act changes the rules around “hardship withdrawals” for retirement savers who are impacted by the coronavirus. Impacted investors are defined as those who are diagnosed with COVID-19, whose spouses or dependents have the disease, or IRA and 401(k) owners who experience financial hardship due to quarantines, furloughs, layoffs, or a reduction in working hours because of the virus.
Under the new law, affected savers can take hardship withdrawals of up to $100,000 from retirement plans and IRAs in 2020. These withdrawals will still be taxable. But retirement savers will be given two different options to repay the tax:
- An account owner can pay the income tax due on the withdrawal over three years instead of in the first year. Account owners under the age of 59½ are exempt from the usual 10% penalty.
- Retirement savers can put the money back into a 401(k)-type plan or an IRA within three years. If they use this option, they will be allowed to skip the tax payments, even if the amount they want to redeposit exceeds the annual contribution limit.
- Doubling of 401(k) Plan Loans
The new law doubles the maximum amount 401(k) participants who are affected by the virus can take as a plan loan. Previously, the maximum amount a participant could borrow was 50% of their vested balance or $50,000 – whichever was less. Under the CARES Act, investors can borrow 100% of the account balance or $100,000 – whichever is less. Investors with 401(k) loans can delay repayment due in 2020 for one year.
But IRA owners take note: While you can take a hardship distribution, IRAs do not offer loan opportunities. Taking a loan from your IRA is considered a prohibited transaction.
Managing Your Retirement Savings Amid the Coronavirus Pandemic
These are unprecedented times, and this coronavirus relief law may help many retirement savers mitigate the economic fallout of the pandemic. But before dipping into your retirement savings, speak with a trusted financial professional. The two of you should discuss whether it makes economic sense to access your nest egg earlier than planned and what impact it may have on your meeting your savings goals. While the CARES Act eases hardship distribution and loan rules, this is not free money. Hardship distributions and loans will need to be repaid, and you will owe tax on traditional 401(k) and IRA withdrawals.
PENSCO is dedicated to helping our clients navigate this challenging time. If you have IRA-related questions on the CARES Act, you can call our Client Services team at 1-800-962-4238 Monday through Friday, 7 a.m.-5 p.m. MT. You may experience long wait times, and we appreciate your patience as we handle all calls as quickly as possible. For non-urgent matters, you can email us at email@example.com.
This Blog does not provide investment, tax, or legal advice nor does it evaluate, recommend or endorse any advisory firm or investment vehicle. Investments are not FDIC insured and are subject to risk, including the loss of principal.
PENSCO Trust Company performs the duties of an independent custodian of assets for self-directed individual and business retirement accounts and does not provide investment advice, sell investments or offer any tax or legal advice. Clients or potential clients are advised to perform their own due diligence in choosing any investment opportunity as well as selecting any professional to assist them with an investment opportunity. Alternative investments are not FDIC insured and are subject to risk, including loss of principal. Other than the Opus Affiliates, PENSCO is not affiliated with any financial professional, investment, investment sponsor, or investment, tax or legal advisor.