The Coronavirus Aid, Relief, and Economic Security (CARES) Act, passed March 27, 2020, offers relief for qualified individuals suffering from COVID-19, specifically in terms of your retirement accounts. 

Make sure to not pull out or put money into these retirement accounts without talking to a financial professional familiar with the regulations. Even with this relief, it is still necessary to make sure you are following the rules and do not incur any extra penalties or taxes.

CARES Act: Withdrawing money from eligible retirement plans 

The CARES Act gives huge relief to people who have been financially impacted by COVID-19. 

The Act allows qualified individuals to withdraw to $100,000 from their tax-advantaged retirement accounts, such as IRAs, 401ks, and 403bs. The rules of your retirement plan must specifically allow in service withdrawals. 

Do I have to pay a penalty on my early withdrawal from my retirement account? 

The CARES Act waived the 10% penalty that is usually put on early distributions from retirement accounts before the age of 59 ½ . The distribution must be a “coronavirus-related distribution” (CRD) made in 2020 and under $100,000 for the penalty to be waived. 

Do I have to pay taxes on my early withdrawal from my retirement account?

Any early withdrawals from a retirement account are still subject to taxation. With CRDs, you have the option to spread the tax over 3 years or put the money back into the account and defer the tax.

State and local income taxes might not allow the tax to be paid back over 3 years, so make sure to consult a tax professional who can look into this for you. 

Remember, if you have any Roth accounts, these rules are not going to apply since you have already paid taxes when you put the money into these accounts. 

Am I a qualified individual? 

You are only allowed to take advantage of the early distributions from retirement accounts if you are a “qualified individual”. The definition of qualified individual includes: 

• People diagnosed with COVID-19
• People whose spouse or dependent was diagnosed with COVID-19
• People who experience adverse financial consequences from being quarantined 
• People who experience adverse financial consequences from being furloughed, laid off, or having hours reduced 
• People who experience adverse financial consequences from being unable to work due to a lack of child care

If you have any doubts that you are a qualified individual, make sure to talk to a professional who can help guide you through the requirements. 

CARES Act: Delaying Required Minimum Distributions (RMDs) 

Under the CARES Act, required minimum distributions, or RMDs, have been suspended for 2020.  You do not have to be a qualified individual to take advantage of this. 

Typically, once you turn 70 ½ , you must start taking distributions from your retirement accounts or face a large penalty. Recently, due to the passage of the SECURE Act, the age for required minimum distributions was pushed back to 72. 

The RMD waiver applies to traditional IRAs and workplace plans like SEP, 401(k), 403(b) and 457(b) plans. This waiver also includes RMDs from Inherited IRAs in 2020. It is important to note that IRAs should not be used as wealth transfer vehicles. While you can’t do anything if you’ve already inherited an IRA, it is a good idea to start planning now for your own personal IRA. Leaving an IRA to your heirs creates a tax problem for them; there are better ways to get them the money. 

Of course, if you still need to or want to, you can take distributions from these accounts throughout 2020.

Can I roll back the required minimum distribution that I already took in 2020?

If you have already taken RMDs from your retirement account in 2020, the CARES act provided for a small deadline extension if you want to put money back into your account.

Typically, rollovers are required to be made within 60 days from when you took out the distribution. This is now extended for RMDs in 2020. If you took an RMD between February 1, 20220 and May 15, 2020, you have until July 15, 2020 to roll back the money. 

There are more requirements and restrictions that were already in place for RMD rollovers that still need to be followed. 

The CARES Act gives you a lot of flexibility with your retirement account. While it will provide great relief for some, you want to make sure that it is the right decision for you before making any moves with your money. Talk to a professional, like Cardinal, to make sure you do this in the right way.