New Retirement Account Rules – COVID-19

The Coronavirus is changing the landscape, as we know it, in almost every part of life. Unquestionably, it’s also shaking up the financial universe and changing rules that have been etched in stone for decades, and retirement accounts are no exception.

With the Coronavirus Aid, Relief, and Economic Security Act (CARE) now law, Americans 72 years old and older get a reprieve this year from the required minimum distributions they are normally forced to take from IRAs. You can skip RMDs in 2020. The 50% penalty for not taking RMDs this year is also waived.

Here are the highlights of some of the other rule changes:

  • You can withdraw up to $100,000 for coronavirus expenses.
  • You will have to pay income taxes on the withdrawal, but the tax bill can be paid over three years.
  • The 10% penalty for early withdrawal from an IRA has been eliminated for 2020.
  • You will have three years to put withdrawn funds back into a retirement account.
  • 401(k) loan limits are increased to $100,00 or 100% of your vested balance, whichever is less.
  • You also have longer to make an IRA contribution for 2019. The deadline has been extended three months to July 15, 2020.

Retirement savers who have been negatively impacted by the coronavirus crisis can now withdraw up to $100,000 from a 401(k), IRA or similar type of retirement account until Dec. 31, 2020, without being charged the usual 10% early withdrawal penalty.

Those who are diagnosed with COVID-19 by a test approved by the Centers for Disease Control and Prevention or who have a spouse or dependent who tests positive for the coronavirus can take emergency retirement account withdrawals.

Those who experience adverse financial consequences as a result of being quarantined, furloughed, laid off, reduced work hours or being unable to work because of a lack of child care due to the coronavirus pandemic are also eligible for the emergency withdrawals.

However, you will need to pay income tax on withdrawals from traditional retirement accounts and will be drawing from an account that has recently lost value without giving it time to recover.

Pay the Income Tax Due on Retirement Account Withdrawals Over Three Years

Income tax will be charged on emergency retirement account withdrawals from tax-deferred accounts. However, the CARES Act allows you to spread the income tax bill over a three-year period, beginning in the year the distribution is taken.

You Can Put Withdrawn Funds Back in a Retirement Account

Retirement accounts are subject to annual contribution limits, which can make it difficult to rebuild your retirement account balance after you have taken an early withdrawal. However, those who take coronavirus emergency withdrawals can put the money back in a retirement account at any time during the three years after the distribution.

Participants in 401(k) plans are generally eligible to borrow as much as 50% of their vested account balance up to a maximum of $50,000. The CARES Act allows retirement savers to borrow 100% of their vested account balance up to a maximum of $100,000 during the 180-day period after the law is implemented.

401(k) loans also charge interest and fees, and if you lose or leave your job, the loan could become due sooner than expected. Those with outstanding 401(k) loans that are due before Dec. 31, 2020, can delay repayments for one year.

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