In these uncertain times, you might be wondering what the COVID-19 crisis means for your financial future. Three retirement relief measures made it into the $2 trillion Coronavirus Aid, Relief, and Economic Security (CARES) Act passed by the Senate. Here’s how these three key provisions will affect your retirement savings if the bill passes.
Early Withdrawal Penalties Waived for Hardship Distributions from Retirement Plans
The bill allows you to take a coronavirus-related distribution of up to $100,000 from your retirement plan or IRA this year. The usual 10% penalty for early withdrawal would be waived if you are under the age of 59 ½.
Those who qualify include individuals positively diagnosed with COVID-19, have spouses or dependents who have been positively diagnosed, and those financially affected by quarantines, furloughs, layoffs or shortened hours due to coronavirus.
You’re still cutting into your retirement savings and would have to pay income tax on the withdrawal, but the bill would allow three years to pay the income tax as well as replace the amount withdrawn.
Loan Limits from 401(k)s Are Doubled
Larger loans from your workplace retirement plan are also on the horizon. The rules would be relaxed, allowing you to borrow up to $100,000 from your 401(k). Loans from 401(k)s are usually limited to the lesser of either $50,000 or 50% of your vested account balance. So, this provision would basically double the limit you can borrow against the amount saved in the plan.
The same hardship qualifications apply: positive diagnosis of COVID-19 for self, spouse or dependents, and financial consequences of quarantines, furloughs, layoffs or shortened hours.
Retirement plan loans are subject to a different set of rules than withdrawals. You can borrow against your savings tax-free if you meet the requirements. If you fail to repay the loan, it’s treated as a distribution and will be subject to taxes.
Some plans may require you to borrow from your savings before resorting to hardship withdrawals, so be sure to do your homework before putting your plans in motion.
Suspension of Required Minimum Distributions (RMDs)
In previous years, savers were required to take annual mandatory distributions from their workplace retirement plans and IRAs upon turning 70½. As of 2020, the Required Minimum Distribution (RMD) now applies only to those 72 and older.
Once the bill is signed, retirees can suspend required minimum distributions from retirement accounts for the entirety of 2020 or until a new bill is passed.
Since the value of many retirees’ accounts has fallen this year, this gives retirees more flexibility. Those who don’t need the income can leave the money in the account and allow time for the market to rebound, rather than withdrawing while COVID-19 is causing fluctuations.
The bill is, on the whole, aimed at bringing relief to those who are struggling as a result of the COVID-19 pandemic. This provision, however, will be most helpful for those who are not affected or as impacted by the current crisis.
The Coronavirus Relief Bill & Your Retirement
In summary, the three things this relief bill would make possible are:
- Coronavirus-related distributions of up to $100,000 from your retirement plan or IRA without the 10% early withdrawal penalty.
- Loans of up to $100,000 from your 401(k), which is double the usual amount.
- Waiving required minimum distributions from retirement savings in 2020.
Make sure to talk with your financial advisor about the Coronavirus Relief Bill and what options are open to you, as well as the pros and cons of each choice. RITA has a full member directory of self-directed retirement professionals that are here to help you with these important decisions.