CARES Act - What you need to know about your IRA
/In order to combat the many economic implications of the coronavirus pandemic, a monumental emergency funding bill has been passed. The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) aims to provide relief to American citizens and businesses through a variety of financial measures. One particular focus of the bill is on how Americans can use their retirement accounts during a potential time of need. This post will focus on 3 measures related to IRA accounts; Required Minimum Distributions, early distributions, and special tax treatment of distributions. The first of the provisions apply to all Americans while the second and third apply only to those directly affected by the virus (defined below.)
Required Minimum Distributions (RMD) are waived for 2020
An RMD is a required amount of money that is required to be withdrawn from an IRA (traditional, SEP, or SIMPLE) by April 1 following the year account holders reach age 72 (prior to 2020, the RMD age had been 70½ years old). The CARES Act suspends any required minimum distribution for 2020. The purpose of this provision is two fold. First, this provision enables retirees, who are able to forego the RMD, the ability to leave that money in their account, allowing more time to recover from the market correction. Secondly, suspending the RMD provides tax savings as retirees no longer have that amount included in their taxable income.
Early distributions (prior to age 59 1/2) are exempt from penalty
One well known characteristic of IRA’s is the early withdrawal penalty. This rule says that any dollars withdrawn “early” or before reaching age 59 1/2, are subject to a 10% penalty from the IRS (and also taxable.) This rule exists to dissuade retirement savers from accessing their retirement accounts before retirement. Given the situation, the CARES Act allows for Americans to withdraw up to $100,000 from their IRA’s without incurring a penalty. The provision recognizes that certain Americans may be pressed for liquidity in this moment and is allowing them to access IRA balances without penalty.
Tax Implications of an early distribution
When a dollar comes out of a traditional IRA (non ROTH) it is deemed taxable. Typically, if someone younger than 59 1/2 has to make a withdrawal from an IRA it is subject to both tax and the 10% penalty. The CARES Act added a provision such that if an affected person has to take a withdrawal, they have the option to spread the tax implications of that withdrawal over 3 years. Additionally, you have the option to “repay or to put that money back into the IRA such that it would be treated as a rollover. These options provide a fair amount of flexibility for someone who may be in a tough financial situation due to the coronavirus.
The CARES Act defines “affected” people as those:
who is diagnosed with coronavirus
whose spouse or dependent is diagnosed with coronavirus
who experiences adverse financial consequences as a result of:
being quarantined,
being furloughed or laid off,
having reduced hours,
being unable to work due to lack of childcare,
closing or reduced hours of a business owned or operated by the participant, or
any other factor determined by the Secretary of the Treasury.
If you have any question about how the CARES act could affect your IRA please give me a call.
-James Chapman
To access the full Bill please click (HERE)
