Cares Act – Part 2
This is the second part in a series regarding the CARES Act. The first segment discussed the tax credit or
rebate check that is being sent to qualifying individuals and families. The following is a discussion of the
impact of CARES Act on the retirement accounts.
The CARES Act focused a lot of attention on retirement accounts into 3 major areas: Coronavirus‐Related
Distributions, Enhancements to Loans from employer‐sponsored retirement plans, and waiver of required
minimum distributions in 2020.
- Coronavirus‐Related Retirement Distributions. For those taxpayers impacted by the Coronavirus, they are eligible to take distributions up to $100,000 from IRAs and employer sponsored retirement accounts (401(k), 403(b) etc.) and receive the following benefits:
- Not be subject to the 10% penalty or the mandatory 20% withholding requirements from employer plans.
- Distributions can be repaid over 3 years. The repayment can be made anytime within a three year period in a single payment or multiple payments.
- Income can be spread over three years. This provides planning opportunities with regard to income averaging and amend income tax returns.
Thus far, being impacted by the Coronavirus has been liberally defined by Congress as any of the
- Being diagnosed with COVID‐19;
- Having a spouse or dependent who has been diagnosed with COVID‐19
- Experiencing adverse financial consequences as a result of being quarantined, furloughed, laid
off, or having hours reduced because of the disease.
- Not being able to work because they lack childcare as a result of the disease.
- Own a business that has closed or operate under reduced hours because of the disease;
- Meet some other reason that the IRS decides is permissible.
Enhancements to Loans from Employer Sponsored Retirement Plans. Prior to the CARES Act, the maximum
loan amount form a employer sponsored retirement plan was the lesser of 50% of the account balance or
$50,000. As a result of the CARES Act, the maximum loan amount is $100,000. The limitation of 50% of the
account balance is removed. Finally, loan payments that would be owed to the plan loan maybe delayed
up to one year if the loan was enacted by the end of 2020.
Required minimum distributions (RMDs) are waived in 2020. Similarly to what the government did in 2009,
the CARES Act suspends RMDS taken in 2020. This also includes the suspension of RMDs from
beneficiaries’ stretch IRA accounts. Moreover, if a taxpayer has already taken or partially taken their RMD
in 2020, the taxpayer can put the amount back into their retirement account. This provision would allow
the taxpayer to possibly put the money back into the retirement account when prices are lower than
when the taxpayer might have taken the distribution earlier in the year. In a way, one might compare it to
“selling short against the box.” In order to return the unwanted 2020 RMD’s, the taxpayer would only have
to meet one aforementioned six conditions under the Coronavirus Related Distributions. It appears that
taxpayer would have 3 years to return the unwanted 2020 RMDs.
If the taxpayer turned 70 1/2 in 2019 and choose to start their RMDs in 2020, they get a “double bonus” as
both RMDs – the one that had to be taken by April 1st for 2019 and the one for 2020‐ may be suspended.
Please note that the taxpayer cannot put the RMD back into a beneficiary IRA account.
There is a planning opportunity if the taxpayer has a guaranteed lifetime withdrawal benefit on a IRA
account. The withdrawal amount should not be returned to the IRA annuity where it originated, but
deposited into an IRA brokerage account.
Finally, I want to mention a minor area of change that I don’t believe will affect many of my clients is that
2020 is disregarded with regard to the 5‐year rule. For non‐designated beneficiaries of retirement
accounts, the 5 year rule actually becomes the 6‐year rule. Thus, the retirement account must now be
distributed to the non‐designated beneficiary within 6 years. Generally, this pertains to non‐natural
beneficiaries – estates, charities, and certain trusts.
The CARES Act provides opportunities, but introduces snares as it relates to retirement accounts. Before
taking any action, please contact my office so we can further discuss your personal situation.