As we navigate through this challenging environment, we want to tell you about several provisions within the CARES Act that you may want to consider for IRAs and employer retirement plans.
If one of the following situations applies to you, you may be eligible for early withdrawals or increased loan amounts from your retirement plan:
- You, your spouse, or a dependent is diagnosed with COVID-19; or
- You experience adverse financial consequences as a result of you or your spouse or a member of your household (defined as someone who shares the your principal residence) being quarantined, furloughed or laid off, having reduced work hours or pay, a job rescinded or start date delayed, child care responsibilities or business closures due to COVID-19.
No penalty on early withdrawals
Typically, you would have to pay a 10% early withdrawal penalty for withdrawals from retirement accounts before age 59 ½. Under the CARES Act, this penalty is waived for eligible individuals for up to $100,000 of withdrawals taken in 2020. However, income tax on distributions of pre-tax assets would still be owed but could be paid over a three-year period.
You also have the option to "recontribute" the funds to a retirement account within three years without regard to contribution limits.
Increase of retirement plan loan limit
If you qualify for COVID-19 relief under the CARES Act, the amount you can borrow from a qualified retirement plan has been increased to the lesser of $100,000 or 100% of the plan participants vested balance. Any increased loan amount must be taken by Sept.22, 2020. However, the deadline to make payments on already-outstanding retirement plan loans due between March 27 and Dec. 31, 2020 can be extended by one year. If a loan is taken and is not repaid, any amount taken may be taxable as income and could also have a 10% penalty. You can contact your plan administrator to determine whether your plan allows for loans.
Required minimum distributions (RMDs) are waived for 2020
The good news with this change is that you do not need to meet COVID-19 qualifying criteria to waive RMDs for 2020.
Under the CARES Act, your RMD is no longer required for 2020. This also applies to RMDs due in 2020, but attributable to 2019. If you have already satisfied the RMD due in 2020, you may be able to put back this distribution, subject to certain conditions. If this is something that you're interested in, contact us before Aug. 31, 2020 to determine your options.
In addition to time, the suspension could bring more tax-deferred growth. If you do not need a distribution from your retirement account(s), you now have additional time to earn tax-deferred growth before distributions are required again in 2021.
Work with your Edward Jones financial advisor to consider these key aspects of the CARES Act as part of your broader financial strategy. As with any decision that could involve tax implications, consult with your tax professional on considerations and impacts to your specific situation. Your financial advisor can partner with him or her to provide additional financial information that can help in the decision-making process.