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401(k) to IRA Rollover Rules Under the CARES Act

401(k) to IRA Rollover

The COVID-19 pandemic has drastically impacted almost all U.S. individuals and businesses.  In response to the damaging economic fallout from the pandemic, on March 27, 2020, the President signed into law the CARES Act. The Act is aimed at reducing the economic impact of the novel coronavirus 2019 (“COVID-19”) pandemic and stimulating the economy by approving $2.1 trillion in aid to various sectors of the economy. 

The Act included a number of very important provisions aimed at providing liquidity and capital to individual Americans and many businesses:

  • paycheck protection program provisions;
  • loans and loan guarantees for eligible businesses
  • business and individual tax stimulus provisions through $1,200 stimulus checks; and
  • a number of very important provisions relating to retirement funds

CARES Act Distributions

One of the more important provisions in the CARES Act involving retirement accounts is related to the tax-free $100,000 distribution from a 401(k) plan or IRA.

Unlike an IRA, where distributions can be taken at any time, subject to tax and potentially a 10% early distribution penalty if the IRA holder is under the age of 591 /2, in the case of a 401(k) plan, a triggering event is required.

In almost all cases, one is not permitted to take any money out of their 401(k) plan until they satisfy a plan triggering event. The three most common triggering events are 1) reaching age 59 ½, 2) separating from your job and 3) the plan is terminated.  Assuming you haven’t reached age 59 ½ and the plan is still active, you must not work for your employer anymore.  The CARES Act changes all this and eliminates the triggering plan rules for distributions up to $100, 000, subject to some qualifications.

In general, section 2202 of the CARES Act provides for expanded distribution options and favorable tax treatment for up to $100,000 of coronavirus-related distributions from eligible retirement plans (certain employer retirement plans, such as section 401(k) and 403(b) plans, and IRAs) to qualified individuals, as well as special rollover rules with respect to such distributions

WATCH: How Do I Report CARES Distributions?

The distributions generally are included in income ratably over a three-year period, starting with the year in which you receive your distribution. For example, if you receive a $9,000 coronavirus-related distribution in 2020, you would report $3,000 in income on your federal income tax return for each of 2020, 2021, and 2022. However, you have the option of including the entire distribution in your income for the year of the distribution.  In addition, you have the option of returning the amount taken within three years and paying no tax or penalty on the distributed amount.  Hence, the $100,000 CARES penalty-free distribution option can be used as a three-year tax- and penalty-free loan.

In order to take advantage of the CARES Act $100,000 penalty-free distribution option, a 401(k) plan participant would need to:

  • Be diagnosed with the virus SARS-CoV-2 or with coronavirus disease 2019 (COVID-19) by a test approved by the Centers for Disease Control and Prevention;
  • A spouse or dependent is diagnosed with SARS-CoV-2 or with COVID-19 by a test approved by the Centers for Disease Control and Prevention;
  • Experience adverse financial consequences as a result of being quarantined, being furloughed or laid off, or having work hours reduced due to SARS-CoV-2 or COVID-19;
  • Experience adverse financial consequences as a result of being unable to work due to lack of child care due to SARS-CoV-2 or COVID-19; or
  • Experience adverse financial consequences as a result of closing or reducing hours of a business that you own or operate due to SARS-CoV-2 or COVID-19.

401(k) to IRA Rollover

If you gain access to your 401(k) plan funds because you are either over the age of 59 1/2 or you satisfy the CARES Act provisions, assuming your employer includes the CARES provision in the plan, you will have access to taking advantage of the $100,000 penalty-free distribution.  Since you will be required to certify that you have been impacted by COVID-19, rolling those funds to an IRA may seem to run counter to the intent of the legislation.  The CARES Act legislation is seemingly intended to offer plan participants with needed capital and liquidity to combat the financial impact caused by the COVID-19 pandemic.  Rolling the 401(k) plan funds to an IRA for investment purposes, because IRAs have more investment options, including alternative assets through a Self-Directed IRA, may seem to run counter to the intent of the legislation.

However, if you have a Solo 401(k) plan, since you are likely the trustee and plan administrator of the plan, you can approve the distribution request and do not have to rely on a third-party. In other words, you would be in charge of approving your request to take up to a $100,000 penalty-free distribution under the CARES Act.

Overall, the CARES Act offers many important benefits to American individuals, businesses, and retirement account holders. If considering taking advantage of a penalty-free distribution and use the funds as an IRA rollover, it is important to remember that, if under the age of 59 1/2, the intent of the CARES Act was to offer plan participants impacted by COVID-19 needed liquidity and not greater investment diversification.

Learn More

For more information about the CARES Act and all the ways you can utilize retirement funds to help you during this time, including a 401(k) to IRA rollover, you can contact us @ 800.472.0646. Additionally, you can check out our YouTube page or search for CARES Act on our site!

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