Here’s How To Take Advantage Of Your Retirement Accounts During COVID

On March 27, 2020, President Trump signed the CARES Act into law. Most of us know that the CARES Act offered economic relief through stimulus checks and the Paycheck Protection Program (PPP). But there’s more relief available, including options that allow workers to tap into retirement accounts without a penalty, and take out loans. Here’s what you need to know about tax-favored treatment for retirement accounts during the pandemic:

1. You are not required to take money out of your individual retirement accounts (IRAs) and retirement plans this year. You are typically required by law to take withdrawals from your IRA, SIMPLE IRA, SEP IRA, or retirement plan such as a 401(k) once you reach the age of 72. But the CARES Act waives required minimum distribution (RMD) payments for 2020. The waiver includes RMDs for individuals who turned age 70 ½ in 2019 and took their first RMD in 2020. Waivers do not apply to Roth IRAs – but that’s okay since Roth IRAs do not require withdrawals until after the owner’s death. 
2. Distributions from inherited IRAs are not required in 2020. If you were required to take a distribution within 5 years following the year of the account holder’s death, 2020 does not count toward the 5 years. So, you would essentially have six years, instead of five, to distribute the inherited IRA.
3. You don’t have to have been affected by the pandemic to waive your RMD for 2020.
4. To qualify for tax-favored coronavirus-related withdrawals or loans, you don’t have to be diagnosed with SARS-CoV-2 or COVID-19, but a diagnosis certainly would qualify you; the same is true if your spouse or dependent is diagnosed with the virus. You are also eligible if you experienced adverse financial consequences as a result of being quarantined, being furloughed or laid off, or having work hours reduced due to the pandemic. Ditto if you were financially impacted because you could not work due to lack of child care, or as a result of closing or reducing hours of a business that you own or operate, because of the virus.
5. You can withdraw up to $100,000 from eligible retirement plans (certain employer retirement plans, such as section 401(k) and 403(b) plans, and IRAs) without being subject to the 10% additional tax on early distributions. The distributions are subject to tax, but you can pay the tax evenly over a three-year period, starting with the year in which you receive your distribution. For example, if you receive $15,000 in 2020, you would report $5,000 in income on your federal income tax return for each of 2020, 2021, and 2022. Of course, the IRS isn’t going to turn down your money: If you want to pay the tax faster, that’s okay, too.
6. The limit on withdrawals is a combined limit of $100,000 from all plans and IRAs.
7. If you don’t use all of the distribution, you can recontribute or repay all or part of it back within three years after the distribution is received. In that case, the distribution will be treated as though it were repaid in a direct trustee-to-trustee transfer so that you don’t owe tax on the distribution. If you opt to repay the distribution in a year following a year that you’ve already paid tax on it, you simply amended returns to claim a refund of the tax that you paid in those years.
8. Coronavirus-related distributions are not subject to mandatory tax withholding.
9. If your retirement plan allows loans, your employer can increase the maximum loan amount available to $100,000 (minus outstanding plan loans), or your vested benefit under the plan, whichever is smaller. It is worth noting that this is optional, and increasing the loan amount is at your employer’s discretion: check with your HR department if you’re not sure about your plan.
10. If your retirement plan allows loans, your employer can allow you to hold onto the money for an additional year for repayment of loans from eligible retirement plans (not including IRAs). Again, this is optional so check with your HR department if you’re not sure about your plan.
11. There will be a new tax form available to help keep reporting straight. The IRS will require you to fill out Form 8915-E, expected to be available before the end of 2020, to report any repayment of a coronavirus-related distribution and to determine the amount of any coronavirus-related distribution includible in income for a particular tax year. If that rings a bell, it’s because the 8915 series already exists for 2016 and 2017 qualified disaster retirement plan distributions and repayments
12. The IRS has released guidance. Notice 2020-50 (downloads as a PDF) explains how plans may report coronavirus-related distributions and how individuals may report these distributions on their individual federal income tax returns while Notice 2020-51 (downloads as a PDF) provides guidance relating to the waiver of 2020 required minimum distributions. If you really want some reading material, you’ll find the entire CARES Act here (downloads as a PDF): note that applicable bits are found in section 2202 (that starts at page 60). Some easier reading can be found in the IRS Q&As.