CARES Act Effect on Retirement Plans

The COVID-19 global pandemic sparked an unprecedented health and economic crisis; in response, Congress established the Coronavirus Aid, Relief, and Economic Security (CARES) Act in an effort to provide financial aid and emergency support. This act temporarily changed certain rules pertaining to IRAs and employer-provided retirement plans: Taxpayers under the age 59½ may be eligible to take an early distribution penalty-free, whereas taxpayers over the age 72 are no longer required to take a required minimum distribution (RMD).

Typically, those under the age 59½ who withdraw funds from their IRA account or other defined contribution retirement plans may face a 10% tax penalty. The CARES Act eliminated these fees for eligible individuals, thus providing them early access to up to $100,000 of their retirement contributions and earnings without penalty. To qualify, the taxpayer must be able to prove that:

He or she contracted the coronavirus,
His or her spouse or dependents contracted the coronavirus, or
He or she suffered adverse financial consequences as a direct result of the COVID-19 pandemic. This includes, but is not limited to, experiencing reduced work hours or being unable to work due to quarantine mandates or lack of child care availability. Laid off or furloughed individuals are also eligible.

Taxpayers who participate in traditional IRAs and employee-sponsored plans are required to include these distributions with their gross income; however, they have the option to proportionately distribute this income over three years, thus levelling out their future tax burden. For example, if Taxpayer X withdraws $12,000 from their account in 2020, they can include only $4,000 in their 2020 taxable income, with the remaining $8,000 deferred until 2021 and 2022. They also have the option to repay part, or all, of these coronavirus-related distributions back within three years in order to claim a refund for taxes previously paid or to avoid paying future taxes.

The CARES Act also suspended the requirement for taxpayers to take a calculated RMD each year after reaching the age 72. This gives traditional IRAs and other accounts the chance to recover after devastating blows and volatility to the stock market throughout 2020. In addition, taxpayers can forgo taking these distributions in order to lower his or her tax liability. For those who already took the required minimum distribution in 2020, the IRS offers the opportunity for repayment: Retirees had until August 31^st, 2020 to recontribute their withdrawals. This applies to all RMDs taken so far throughout the year.

The new required minimum distribution guidelines apply to accounts held personally, as well as inherited-IRA accounts held by beneficiaries. In addition, taxpayers who turned 70½ prior to January 1^st, 2020 can also avoid taking the RMD. The IRA contribution limit did not change, although the IRS extended the due date for contributions to July 15^th.

For more information regarding your specific retirement plan, please contact your plan provider or administrator. If you would like to further discuss your distribution options and the associated tax implications, please contact our office 615-750-5537.