The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) was signed into law on March 27, 2020. Among other measures designed to ease the financial burden of the COVID-19 pandemic, this new law changes the way you can access funds from your retirement account.
To understand how this new Act may impact you, we need to first review the Setting Every Community Up for Retirement Enhancement Act of 2019 (SECURE Act) which was passed on December 20, 2019, and changed the required minimum distribution (RMD) rules for people with IRAs. Under the SECURE Act, if someone reached the age of 70½ in 2019 or earlier, then that person must take the first RMD by April 1, 2020. If a person reaches age 70 ½ in 2020 or later, that person must take the first RMD by April 1 of the year after reaching age 72. In addition to this group of people, other people may be taking RMDs from inherited IRAs. People only need to take an RMD from a 401(k) if they are no longer working or if they are working, but the 401(k) plan is from a previous employer.
Required Minimum Distributions from retirement plans and accounts (like an IRA or 401(k))
Under Section 2203 of the recently passed CARES Act, there is a temporary waiver of RMD rules for this year. Under the Act, anyone who was required to take an RMD in 2020 is no longer required to take the RMD. If a person still wants to take the RMD, however, they may take it.
Withdrawals from retirement funds
In addition to the RMD provisions under the CARES Act, Section 2202 contains rules regarding withdrawals from retirement funds and loans from qualified plans. These rules only apply to individuals diagnosed with SARS or COVID-19, individuals with a spouse or dependent diagnosed with SARS or COVID-19, or individuals who experiences adverse financial consequences because of quarantine, furlough, layoff, reduced work hours, or inability to work due to child care because of SARS or COVID-19.
Such individuals can withdraw up to $100,000 and not be subject to the 10% early withdrawal penalty. Repayment can be made over a three-year period beginning on the date of withdrawal, and the distribution may be taxed over three years instead of entirely in 2020.
Loans from qualified employer plans (like a 401(k))
For those who may wish to take a loan from an employer plan, the maximum amount has been increased from $50,000 to $100,000. Loans can now be taken up to 100 percent of the participant’s vested account balance instead of 50 percent. There is a window of 180 days from enactment of Act to take the loan, and any loan repayments due before December 31, 2020, can be delayed up to one year. These changes apply to any 401(k) plan regardless of whether or not in pay status.