Responding to the COVID-19 crisis, Congress passed a raft of new rules in its CARES Act that impact retirement plans. Even though we’re eight months into the pandemic, they still apply.
Realizing that the crisis will financially impact millions, Congress built in some flexibility to how money can be withdrawn from plans like 401(k)s. While there are some new options, you have to be careful. Here’s an analysis from the Congressional Research Service:
- COVID-19 Related Distributions Exempt from 10% Tax Penalty. Normally, you would pay a penalty for early withdrawals from retirement plans. But to get this break you are limited to up to $100,000 taken from January 1, 2020, through December 31, 2020. The exemption is also limited to “qualified individuals are individuals (1) who tested positive for COVID-19 or those with a spouse or dependent who tested positive for COVID-19, (2) facing financial difficulties due to being quarantined, furloughed, laid off, or unable to work due to lack of child care or reduced work hours as a result of COVID-19, or (3) whose business closed or reduced hours as a result of COVID-19.”
- RMDs Suspended for 2020. Under the old rule, once you hit 72, you had to start withdrawing funds from your 401(k), 403(b), 457, and conventional IRAs in Required Minimum Distributions (RMDs). That provision is set aside for 2020. “Individuals who received their RMDs in 2020—prior to the enactment of the CARES Act—may be able to roll over these amounts to IRAs or other retirement plans if rollover rules are followed. Among other requirements, rollovers must be completed within 60 days of the distribution.”
- Loan Rules Modified. Let’s say you want to take a loan from your 401(k). Under the new rules, “the maximum loan balance for loans taken within 180 days of the bill’s enactment (March 27, 2020) is increased to the lesser of the participant’s entire vested account balance or $100,000. For new or existing loans, the due dates for payments due on or after the bill’s enactment through December 31, 2020, are extended by one year. Subsequent payments are also delayed by one year.
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Jeff G. Labelle
President & CEO | Gulf Coast Wealth Advisors
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