The CARES Act and Retirement Accounts: Three Things to Know

The Coronavirus Aid, Relief, and Economic Security (CARES) Act was signed into law on March 27, 2020. This law was created in response to the COVID-19 pandemic, which has had a tremendous impact on the financial and physical health of Americans and businesses across the country. It offers relief for individuals, businesses, and state and local governments facing financial pressures as a result of the pandemic.

For individuals, there are particularly interesting impacts on retirement savings and planning. Below are items that investors should keep in mind when considering changes to the ways that they save for, and live in, retirement.

RMDs waived for 2020
The CARES Act issued temporary waivers for:

2020 required minimum distributions (RMDs) for all defined contribution retirement plans, including rollover and traditional IRAs, 401(k)s, 403(b)s, SEP IRAs, and SIMPLE IRAs. The waiver applies whether you are the original owner of the account or have inherited the account.

2019 RMDs due by April 1, 2020, for individuals who turned 70½ last year and didn't take the RMD before January 1, 2020.

If you have already taken your RMD or a partial retirement distribution for 2020 in the last 60 days, you may be eligible to "roll back" this distribution into an IRA or employer-sponsored plan (if the plan permits). If you took a distribution more than 2 months ago, it likely doesn't fall within this rollover window. It is also important to know that IRS rules don't permit distributions from inherited IRAs to be rolled over to otherwise eligible plans.

Considerations for Roth IRA conversion
Considering a Roth IRA conversion to take advantage of lower income and taxes in 2020 may make sense for you. Because RMDs are suspended for 2020, investors older than 70½ have the rare opportunity to do a Roth IRA conversion with money from their IRAs that normally would go toward their RMDs. You will still pay taxes, but the Roth IRA conversion would occur when the stock market overall is down from its value at the end of 2019, which could reduce the tax impact. The future potential growth would also occur tax-free in your Roth IRA. It is also important to remember that Roth IRAs have no RMDs, which could lower future tax obligations.

Hardship withdrawals and loans from retirement accounts
Under the CARES Act, investors affected by the coronavirus may be able to take distributions in 2020 of up to $100,000 from an IRA or employer-sponsored plan. These distributions won't be subject to the usual 10% early withdrawal penalty. Additionally, the income tax due on such distributions can be spread over three years, and investors have the option to return some or all of the funds to an IRA or another retirement plan within three years. The $100,000 maximum is a total aggregated amount per investor from all retirement accounts.

The bill also increases the limit on loans from qualified retirement plans from $50,000 to $100,000 and allows borrowers to defer repayments for 2020, thereby extending the repayment time frame by one year. You pay no taxes on the amount you initially receive. However, if you're not able to pay back the loan, with interest, in the time allotted, you may be responsible for a big tax bill. Investors may want to consider taking loans against other assets before using this tool.

To quality for both the special withdrawal and new loan terms, you must meet one of the following criteria:

You, your spouse, or your dependent is diagnosed with COVID-19; or
You experience adverse financial consequences due to COVID-19 as a result of furlough, layoff, reduction in work hours, inability to work due to lack of child care, closing/reduced hours of the business you own or operate, or other reasons identified by the Treasury.

We are available to help
Our team of experienced advisors can help you understand which parts of the CARES Act apply to your financial situation. Whether it is discussing your RMD strategy, examining whether a Roth IRA conversion makes sense, or looking at the practicality of special withdrawals and loans, we are here to help. Reach out to us today to schedule a phone or video call if you would like guidance in any of these areas. Because of the many nuances of individual situations and the complexity of the tax code, we highly recommend coordinating with your accountant when considering these tactics. We are happy to confer jointly with you and your accountant on what makes sense for you. We believe coordinating with your other trusted advisors is critical to helping you keep your financial house in order.