The CARES Act Makes Retirement Account Savings More Accessible
How the relaxed rules on retirement plans can help American workers.
By Steve Jones
Regional Director, Gulf Coast
Private Client Group
Hilltop Securities Inc.
As the COVID-19 crisis continues to evolve, individuals and families of all income levels are concerned about their financial well-being. However, relief may be within reach. On March 27, 2020, President Trump signed into law the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), the largest economic aid package in US history.
The CARES Act includes provisions that allow some investors earlier access to their retirement savings to help offset the financial consequences of COVID-19. For Americans with certain tax-advantaged retirement accounts—such as 401(k)s, 403(b)s, 457s, and Individual Retirement Accounts (IRA)—the new law makes it easier to withdraw funds and relaxes rules on early retirement distributions and loans.
Below are some key retirement-related provisions in the CARES Act that can help you ease the financial impact of COVID-19.
CARES Act Withdrawal Eligibility Requirements
While the CARES Act lets you access your retirement savings earlier if you currently have a tax-advantaged retirement account in place, you do have to meet specific criteria related to the COVID-19 pandemic and its rippling effects:
You, your spouse, or dependent is diagnosed with COVID-19.
You experience adverse financial consequences as a result of being quarantined, furloughed, laid off, having your work hours reduced, or a lack of accessible child care makes it impossible for you to work.
You are a business owner who was forced to close or reduce work hours as a result of COVID-19.
You should also consult your plan provider to confirm you’re eligible to withdraw from your retirement savings. Some providers may ask for additional verification to help ensure you receive your benefits without penalties.
Coronavirus-Related Distributions from Retirement Accounts
Under the CARES Act, if you’re considered a qualified individual and have a certain tax-advantaged retirement plan, you can take an early distribution from your retirement savings of up to $100,000 between January 1, 2020, and December 31, 2020.
Prior to the passage of the CARES Act, if you took early distributions before age 59 ½, you were typically subject to a 10 percent early withdrawal tax penalty. However, if you take Coronavirus-Related Distributions (CRDs) now, you’re exempt from penalties as well as the mandatory 20 percent tax withholding requirement that often applies to retirement plans.
Additionally, you have three years to return the withdrawn money into a retirement account before it’s recognized as income for tax purposes. If you’re unable to redeposit the funds within the three years, you’ll owe income tax on the CRD, but you’ll have the ability to pay it evenly over years 2020, 2021, and 2022.
Temporary Modifications to Retirement Account Loans
Before the CARES Act, you could borrow up to $50,000 or 50 percent of your vested balance, whichever was less. If you’re a qualifying retirement account holder, the new law doubles the loan limits between March 27, 2020, and September 23, 2020. During this 180-day period, you can borrow up to $100,000 or 100 percent of the vested balance, whichever is less.
Traditionally, if you took a loan out on your retirement account, you had five years to repay the full amount. Now you can forgo repayments in 2020 and begin the five-year repayment period in 2021, although interest may continue to accrue on delayed payments.
The extended payback period may be especially helpful if you’re working to regain financial stability. While the money you withdraw won’t be growing in your investment account, you should remember that you’re essentially returning the principal and much of the interest back to yourself.
Suspended RMDs for Retirement Savings Plans
Regardless of whether or not you’ve been impacted by COVID-19, the CARES Act waives the required minimum distribution (RMD) rules in 2020 if you’ve already been receiving RMDs or would have taken your first RMD in 2020.
It’s important to understand that RMDs are calculated using your age and the balance of your retirement account on Dec. 31 of the previous year. Because of the recent economic downturn, suspending mandatory RMDs in 2020 will allow invested funds to stabilize and help you avoid liquidating retirement savings in a time that could result in a loss.
Using Your Retirement Savings to Ease Financial Hardship
The economic impacts of COVID-19 are pushing many individuals and families to make difficult financial decisions just to stay afloat. The retirement-related provisions of the CARES Act aim to support struggling Americans with temporary financial relief as they get back on their feet. To learn more about how your retirement savings plan can help you ease financial hardship, find a HilltopSecurities financial professional near you or call 214.953.4000.
Hilltop Securities Inc. (HTS) is a registered broker-dealer, registered investment adviser, and municipal advisor firm that does not provide tax or legal advice. This material is not intended to replace the advice of a qualified tax professional. Before making any financial commitment, consult with your tax adviser. This information may not be duplicated or redistributed without prior consent of HTS. HTS is a wholly owned subsidiary of Hilltop Holdings, Inc. (NYSE: HTH) located at 1201 Elm Street, Suite 3500, Dallas, Texas 75270. Member: NYSE/FINRA/SIPC.