Several of the relief measures can provide significant peace of mind, as they provide you with the option to access some of the funds in your retirement accounts without the usual penalties if you have been negatively affected by COVID-19.
Deferred RMDs, 5-Year Rule and 401K Loans
In response to the economic fallout stemming from the pandemic, Congress passed the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), which relaxes some of the rules governing your retirement account (e.g., TSP or 401K). For example, if you are younger and COVID has adversely affected you, a key relief measure permits you to withdraw some of the funds in the account without the usual penalties. If you are older AND are (or would be) subject to take required minimum distributions (RMDs), you may defer your distributions this year, which relieves you from the requirement to withdraw money for the sole purpose of paying taxes. Below we explain more fully the changes made to defer RMDs and then changes made to take early distributions and loans due to COVID-related circumstances.
If you have a retirement account such as a 401(k), 403(a) or (b) plan, a 457, or an IRA (not a defined benefit plan), the CARES Act waives RMDs for the calendar year 2020, meaning that if you do not need the distribution, you can leave the funds in your account, avoiding any income tax that would be due if you took a distribution. (Remember, due to the SECURE Act changes, effective January 1, 2020, the law requires account owners typically to take an RMD from their plan upon reaching age 72.)
Provision may lower your tax bill for 2020
70 ½ Deferral
The CARES Act waiver also applies to RMDs for account owners. who reached age 70 ½ in 2019 but deferred taking an RMD in 2019 until April 1, 2020. Normally, account owners in this category would also have to take a second RMD for 2020 by December 31, 2020, but this RMD is waived as well.
Inherited Retirement Accounts
If you have an inherited retirement account – as a “designated beneficiary” then you too may defer taking your RMDs. You may be a designated beneficiary even if the account pays to a trust provided that the trust contains “conduit” provisions permitting the trust to be regarded as a “see through” trust.
When the retirement plan is paid to a trust that does not qualify as a “see through” trust, then in these circumstances the CARES Act adjusts how the “five-year” rule is counted. The five-year rule requires an inherited account to payout within five years of the death if the plan participant dies before age 72 in 2020. So year 2020 will simply not be counted for the purpose of the calculating the five-year rule.
10-Year Payout Rule
The CARES Act has no effect on the 10-Year Payout Rule. As a result of the SECURE Act, the practice of “stretching-out” distribution payments of an inherited retirement account by including the lifespan of the recipient beneficiary in the payout schedule has been curbed for most non-spousal beneficiaries. (Generally, an “inherited retirement account” does not include transfers to the surviving spouse as they are considered instead to be “roll-overs”). Under this 10-year rule, the inherited retirement account must be paid out within ten years, and the 10-year clock begins to run the year immediately after the year that the account owner dies. So applying the 10-year payout rule to deaths occurring 2020, the events of 2020 are simply outside the relevant period for counting the 10 years as the first year will be 2021. This of course could change if Congress provides relief for the 2021 too.
Early Distributions without Penalty
Under the CARES Act, the 10% early distribution penalty tax that would otherwise apply to the majority of distributions made before a participant turns age 59 ½ is waived for “coronavirus-related distributions” (CRD) made at any time during 2020 from qualified retirement plans for distributions of up to $100,000.
CRD is a distribution from an eligible retirement plan made during 2020 to a qualifying individual
The distributions will be subject to income tax, but if you qualify, you may opt to spread the payments evenly over three years rather than having to pay it all in 2020.
You may also recontribute the distributed funds to the retirement plan or another retirement plan (with an exception for 457 plan distributions), by a single rollover or multiple rollovers, within three years of the date of the distribution regardless of any contribution limit established by the plan.
401K Loan Payments
Qualified individuals with an existing loan from a retirement plan that is due to be repaid by December 31, 2020, can delay repayment by one year. Later repayments will be adjusted to reflect the delayed due date plus interest accruing during the delay. The one-year period of delay in repayment is disregarded in determining the maximum five-year loan period.