The Coronavirus Aid, Relief, and Economic Security (CARES) Act provides many economic benefits to citizens and businesses that are designed to help the economic well being of the people and nation. While everyone knows about the stimulus checks that were authorized as part of the law, some of the lesser known provisions may affect your retirement fund.
To qualify for any of these new changes to the law you need to be “personally affected” by the COVID-19 outbreak. This may mean that you, or an immediate family member are diagnosed with the disease; or you have been furloughed, laid off, had work hours reduced or have otherwise had your employment status seriously affected by the pandemic.
Several of the provisions of the CARES act made changes to the way you can withdraw money from your Individual Retirement Account (IRA), 401k employer sponsored retirement plan or your Thrift Savings Plan (TSP) account, which is the 401k plan for federal government employees including military members.
While almost every financial expert strongly advises against taking money out of your retirement fund before retirement, there may be situations where you have no other choice. Just remember, if you are considering a 401k or TSP withdrawal or loan you should only use it as your last resort.
Exclusion of Required Minimum Distributions (RMDs) for 2020
When you reach your early seventies you are normally required to take a certain amount out of your 401k, TSP, or IRA each year or be hit with a penalty from Uncle Sam.
Language in the CARES act effectively did away with that requirement for this year. So, if you are old enough, have enough money to get by on and don’t want to take money out of your retirement savings, you don’t have to this year. This could effectively give you a big tax break.
Extension of Rollover Time Limit
If you want to transfer money from one retirement fund to another you now have longer to do it.
Prior to the CARES act you had 60 days after withdrawing money from your 401k plan to deposit it into another qualified retirement plan. You would normally only do this if you changed employers or found a better plan and wanted to switch.
Under previous rules, if you didn’t redeposit the money within sixty days you were hit with a penalty of 10% of your withdrawal payable to Uncle Sam and on top of that you had to pay taxes on the entire amount.
The new law did away with the 60 day deadline and says that you have until July 15 to reinvest any withdrawals made between Feb. 1 and May 15.
Elimination of Early Withdrawal Penalty
Another provision of the CARES act eliminated the 10% early-withdrawal penalty and the 20% federal tax withholding on all early withdrawals from your retirement account.
If you are younger than 59 years and six months and take money out of your retirement account it is considered an “early withdrawal.” You are limited to a maximum withdrawal of $100,000 under this provision.
While your tax liability is different for withdrawals from a traditional retirement plan and a Roth retirement plan, the penalties have been removed from both. The new law also lets you spread out your tax liability on any early withdrawals over three years instead of hitting you with the entire tax bill in the year you take money out.
Expansion of Loan Limits
If you want to get a loan from your 401k or TSP account, the maximum loan you can get has been increased from $50,000 to $100,000. Also, if you have an existing loan, you may be eligible to delay repayments for up to one year.