These are truly extraordinary times. With more than 26 million Americans filing for unemployment since the crisis began, many Americans are rightly concerned with how they will pay bills, rent and provide for their families.
As the world grapples with what could be the biggest social and economic event of our time, the U.S. Government’s $2.2 trillion COVID-19 stimulus plan — the Coronavirus Aid, Relief, and Economic Security (or “CARES”) Act — was passed to provide much-needed support for businesses and individuals. While well-covered by national media, some of the key benefits for those with retirement assets have been lost in the news of the crisis.
Many Americans are aware of the provisions aimed at helping “Main Street”, including $1,200 checks being sent to millions of Americans and small-business loans, the CARES Act also includes some hidden benefits for individuals with retirement assets, specifically 401(k) and other retirement accounts.
Under the special and temporary coronavirus rules in the CARES Act, participants may now access their retirement savings while they’re still working or take a larger than normally allowed plan loan. To qualify for these “coronavirus-related” distributions and loans, a participant or their immediate family must be diagnosed with COVID-19, or a participant must suffers losses due to being quarantined, furloughed, laid off, having work hours reduced, or being unable to work due to a lack of child care.
1. Loans: Historically, you were only able to borrow $10,000 or up to 50% of your vested account balance up to $50,000. Now, if the plan permits, they have doubled participant loan limits; participants can now borrow 100% of their vested account balances up to $100,000. Also, for those that already have loans outstanding, they can delay repayment up to one year.
2. Hardship withdrawals: Another special allowance in the CARES Act waives the 10% tax on early withdrawals of retirement assets of up to $100,000 in 2020 for qualifying participants. This applies to both qualified retirement plans and IRAs (traditional and Roth). Income tax for any amount withdrawn is waived if the coronavirus-related distribution is repaid within in three years to the plan or another plan that can accept rollovers. If the distribution is not repaid, participants may choose to include the distribution in their taxable income over a three-year period.
3. Required Minimum Distributions (RMDs): The Act temporarily suspends the RMD requirement — regardless of whether an account owner was affected by the coronavirus — and waives the 50% tax penalty for calendar year 2020. If an RMD has already been received during 2020, it may be rolled over, including rolling back into the plan, to avoid the tax on the distribution. The suspension and waiver apply to RMDs from IRAs (traditional and Roth) and DC plans, including 401(k), 403(b) and 457(b) plans.
It’s also important to note that these are the accommodations the government will allow — but adopting these changes means that Plan Sponsor will need to make these changes to individual plans, so individuals should also talk with their benefits manager to get more details on their specific plans.
In evaluating your options, you want to be careful not to trade one set of problems for another. These dollars should be used for expenses and not luxuries. These are long-term retirement assets, and we wouldn’t normally want to access those dollars today and sacrifice future income, but these are extraordinary times. Be sure to make a repayment plan for when employment and the economy normalizes to ensure that these funds are replenished so retirement is not adversely impacted.
Our thoughts and prayers are with those who have been effected by the virus.
Joel Schiffman is head of U.S. intermediary distribution at Schroders.