CARES Act – Retirement Account Provisions
The Coronavirus Aid, Relief, and Economic Security (CARES) Act provides relief to certain individuals with retirement accounts. The following coronavirus provisions of the CARES act apply to individuals who are diagnosed with COVID-19, have a spouse diagnosed with COVID-19, or experience adverse financial consequences as a result of being quarantined, furloughed, laid off, having work hours reduced, being unable to work due to lack of child care, closing or reducing hours of a business they own or operate, or other factors determined by the Secretary of the Treasury.
Elimination of Early Withdrawal Penalty
In general, distributions from qualified retirement accounts are subject to a 10% early withdrawal penalty if the account owner is less than 59½ years old. The CARES Act waives the 10% early withdrawal penalty for coronavirus withdrawals of up to $100,000 taken from qualified retirement accounts in 2020. Income taxes on the distributions would still apply, however the taxpayer has the option to recognize the income evenly over a three year period (2020, 2021, and 2022). The taxpayer also has the option to repay the early withdrawal within three years from the date the withdrawal was taken.
Loans from Retirement Plans
Employer-sponsored retirement plans may offer loan provisions. In general, the maximum amount of funds that can be withdrawn as a loan is the lesser of $50,000 or 50% of the vested account balance. The CARES Act enhances the amount of funds related to coronavirus that can be taken as a loan from a qualified retirement plan. For loans made within 180 days of the CARES Act enactment, the maximum amount of the loan is increased to the lesser of $100,000 or 100% of the vested account balance. The Act also provides for a one year delay in the due date of an existing outstanding loan if the due date falls between the date of enactment March 27, 2020 and December 31, 2020.
Required Minimum Distributions
In addition to the coronavirus provisions listed above, the CARES Act suspends all required minimum distributions (RMDs) for 2020, including qualified defined contribution plans and traditional and Roth individual retirement accounts (IRAs). For taxpayers that have an inherited IRA and are subject to RMDs over a five year period, 2020 can be skipped, resulting effectively in a six year RMD period.