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CARES Act – What it Means for Retirement Savers

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The CARES Act, passed unanimously by the Senate on Wednesday, features much needed relief for all Americans. The $2 trillion dollar package will give many Americans $1,200, $150 billion to hospitals and the health care sector, as well as $50 billion in loans to the airlines. Along with these funds, the Act contains several measures that help out further. The three that stand out to us, which we will talk about in detail, are the elimination of the early withdrawal penalty, the postponement of the RMD schedule and the doubling of 401(k) loan caps.

What is the CARES Act?

CARES stands for Coronavirus Aid, Relief, and Economic Security Act. It’s a stimulus package aimed at helping all Americans during these trying times. We’ve already seen the extensions of the tax deadline and the IRA contribution deadline. This furthers the relief for everyone affected by the coronavirus, in one way or another. Senators from both sides of the aisles argued about certain provisions in the Act, before coming up with a final version.

Two main components of the Act are relief checks for Americans and greater unemployment benefits. Every adult earning less than $75,000 annually will receive a check for $1,200. Couples earning up to $150,000 will receive a $2,400 check. Further, $500 will be given for each child. Checks are phased out starting at $75,000 and, those who earn $99,000 ($198,000 for couples) or more will not receive a check. Note: there is no “phase-in,” meaning everyone earning $75k or less will get the same amount.

First-time jobless claims are more than three million, according to DOL data. The CARES Act will be welcome relief for those who cannot work during this pandemic. First, the bill will provide an additional 13 weeks of unemployment benefits. Currently, the maximum in most states sits at 26 weeks. More importantly, are four months of $600 weekly payments. This is in addition to the normal benefits one would receive. As of the end of February, the average weekly payment was around $370. This means the unemployed may receive about $1000 weekly for the first four months. A much needed boost for families spanning the country.

What Retirement Savers Need to Know about the CARES Act

IRA/401(k) Plan Distributions

We talked about hardship distributions in an article yesterday. Thanks to the CARES Act, retirement savers affected by the coronavirus can withdraw up to $100,000 penalty-free from their IRA or 401(k) plans.

A “coronavirus-related distribution” is a distribution made during 2020:

  • To an individual who is diagnosed with SRS-COV-2 or COVID-19 by a test approved by the CDC,
  • whose spouse or dependent is diagnosed with one of the two diseases, or
  • who experiences adverse financial consequences as a result of being quarantined, furloughed or laid off or having work hours reduced, or being unable to work due to lack of child care.

So long as you meet one of the above criteria, you can make the penalty-free withdrawal. Keep in mind, taxes will still be due on the amount you withdraw. However, you can spread your tax hit over the next three years. For example, if you withdraw $15,000, you can pay taxes on $5,000 each year. Lastly, there are no withholding taxes on a 401(k) withdrawal. This is huge news for those needing funds, but don’t have other resources available right now.

In addition, funds withdrawn may be re-contributed to any retirement plan, without regards to the contribution limits. Therefore, if you withdraw $50,000, you have three years to contribute that back to your retirement plan, even though it means going over the annual cap. If you choose this option, no taxes will be due on the amount withdrawn.

401(k) Loan Option

If your plan allows for it, you may utilize the loan option to borrow 401(k) funds. Until now, there was a $50,000 cap to a 401(k) loan. However, the CARES Act has doubled that amount to $100,000. A 401(k) loan may be used for any purpose, but only should be considered if absolutely necessary. Of course, there are no taxes or penalties due when taking out a loan. This is assuming you follow the repayment requirements of your plan. Generally, you have up to five years to pay back the loan. Payments are made no less than quarterly and interest rates can be low at the current Prime Rate (which is 3.25% right now).

For those who have an outstanding 401(k) loan, payments are postponed for ONE year. Therefore if you borrowed from your 401(k) prior to the Act, you are given a reprieve for paying back the loan. Of course, if you have the funds to make your payments, it’s probably in your best interest to do so. You might want to get more money back into the plan while the markets are still down. Of course, they may fall further before gaining ground again!

Required Minimum Distributions

RMDs, or Required Minimum Distributions are suspended for 2020. RMDs are required from most retirement plans once you reach age 70 1/2. They are required every year until you pass or have exhausted the funds from your plan. However, the CARES Act has waived all 2020 RMDs. If you have not yet taken an RMD for 2019, you must still do so. Your first distribution is not due to be taken until April 1 the year after you turn 70 1/2. It remains to be seen if you must satisfy them by next week.

The RMD cycle should recommence for 2021. We’ll await word on just how exactly they will resume at a later time. For now, you do not need to worry about taking your required distribution. It’s important to note that thanks to the SECURE Act, the RMD age was pushed back to 72. We will update this section when any news about future RMDs are made public.

Should You Tap Your Retirement Account?

Under normal circumstances, tapping your retirement funds should be a last resort. Of course, these are not normal circumstances. It’s important to keep in mind that any funds withdrawn are no longer tax-advantaged and working for you. Once you distribute money from your account, it’s hard to get them back in there.

However, some might not have any other choice. If you must withdraw or borrow funds, you must realize what has to be done. If you take a loan, you will have to pay it back. Failure to do so will have adverse consequences. On the other hand, a loan is generally a better idea than a straight withdrawal. Although the rules are a little laxer thanks to the CARES Act, taxes will be due on the amount withdrawn. Borrowed funds are not taxed, unless you fail to repay the loan.

The CARES Act will provide some relief to those that are desperate for anything. Hopefully, more aid will be on the way to all Americans. Stay tuned to IRA Financial as we will continue to share all the latest information. Check out our YouTube page to hear IRA Financial President, Adam Bergman’s thoughts about the current economic situation.

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