On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) went into effect. Among other things, the CARES Act is intended to provide emergency assistance to individuals, families, and businesses affected by the 2020 coronavirus pandemic. As each week brings staggering new unemployment numbers, many cash-strapped individuals are wondering how they will make ends meet in the near term. Fortunately, the CARES Act temporarily eases penalties and increases individuals’ ability to access their retirement funds during this unprecedented crisis. However, the decision to access retirement funds early should be made cautiously and only as a last resort.
Waives Penalties for Certain Distributions from Qualified Retirement Plans
The CARES Act waives early withdrawal penalties to individuals for “Coronavirus-Related Distributions” (“CRDs”) – up to $100,000 – from qualified retirement plans that occur between January 1, 2020 and December 31, 2020. Qualified retirement plans include traditional IRAs, 401(k) plans, and 403(b) plans. Usually, individuals under 59 ½ years old are subject to a 10 percent early withdrawal tax penalty. The CARES Act eliminates that penalty for: (1) individuals diagnosed with COVID-19 by a test approved by the CDC; (2) individuals whose spouse or dependent is diagnosed with COVID-19 by such a test; (3) individuals who experience adverse financial consequences due to the COVID-19 pandemic (e.g., due to “being quarantined”, “being laid off”, “having work hours reduced”, “being unable to work due to lack of child care”, “closing or reducing hours of a business”, etc.).
Individuals who find themselves in the circumstances outlined above are eligible to take CRDs for the remainder of the 2020 calendar year (up to $100,000 total). An individual who takes a CRD may pay back the distributed funds to their retirement plan within a three-year period that begins the day after the CRD occurs. If you pay the money back within the three-year period, the CRD will not be treated as income, and thus the CRD will not be a taxable event. You will still owe income taxes on any withdrawn amounts that you do not repay within that time frame.
Increases Ability to Take Loans from Retirement Accounts
Prior to the CARES Act, an individual could take loans from certain retirement accounts (e.g., 401(k), 401(a), 403(b), etc.) only up to the lesser of $50,000 or 50 percent of the account’s vested balance. Now, under the CARES Act, if you qualify for a CRD, you can take a loan from certain retirement plans of up to the lesser of $100,000 or 100 percent of your vested account balance. Importantly, you must take this loan within 180 days of the CARES Act’s enactment (i.e., within 180 days of March 27, 2020). If you pay the loan back within five years, you will not owe any income tax on the borrowed amount. Not all work plans allow for borrowing so you must check with your individual administrator.
Assuming you qualify for a CRD (as many of us do or will), the CARES Act makes it easier for you to access retirement funds to meet your immediate financial needs during this turbulent time. You should contact a financial professional if you have questions about your eligibility to take advantage of these newly enacted provisions. Obviously, each person must weigh their individual circumstances and the impact that taking retirement money early – either as a distribution or as a loan – may have on your future financial security versus the need to have access to money now to meet pressing financial obligations.
Questions: If you have questions about this client alert or other matters, please contact Daniel Bousquet (DBousquet@ftlf.com) or call (202) 466-8960.