The COVID-19 pandemic shut down most of the American economy, triggering massive job layoffs, furloughs and pay cuts. In March 2020, the federal government passed the Coronavirus Aid Relief and Economic Security (CARES) Act to provide financial assistance across many areas of American life. CARES grants COVID-19 retirement savings relief by relaxing some of the tax consequences of taking early distribution of retirement funds. Here’s what you should know.
Use other savings sources first
If you’re going through financial difficulties as a result of the COVID-19 pandemic, think twice before you tap your retirement funds, even though the CARES Act has made it easier to do so. Your retirement money is vitally important, and taking money from retirement early means less money available to grow and compound tax deferred over the years until you actually retire. If possible, take funds from non-retirement investments in stocks, bonds, mutual funds and money market accounts. You could also set up a home equity line of credit [HELOC]. You won’t be charged interest on it until you actually withdraw money.
If you have no choice but to withdraw some retirement funds, here are the CARES Act COVID-19 retirement savings relief provisions you should know about.
Relaxed tax provisions
Normally, you’ll pay a 10 percent penalty if you take a distribution from your IRA or employer-sponsored retirement plan before age 59-and-a-half. CARES waives that penalty for 2020 under the following circumstances.
- You, your spouse or a dependent has been diagnosed with COVID-19.
- You suffered financial loss because you were quarantined, laid off, furloughed or had a cut in your pay or hours as a result of COVID-19.
- You are unable to work because of a lack of child care.
The distributed amount is still subject to regular income taxes, but you may choose to spread the payment of those taxes out over three years. If you pay back the amount taken from your accounts within three years, no tax is due.
In further COVID-19 retirement savings relief, the CARES Act raised the maximum allowable amount for self-loans from an employer-sponsored 401K or 403B account from $50,000 to $100,000. Besides the tax rules, your company’s plan will have its own set of very detailed rules, so examine them closely with your human resources department or a benefits administrator before acting. The Act also grants a one-year delay in repaying retirement plan loans you already have that are due between March 27, 2020 and December 31, 2020.
It’s important to note that plan administrators are not required to adopt any of these COVID-19 retirement savings relief provisions, so check with your employer to see if they have.