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Time to Review Clients' Retirement Accounts |
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The CARES Act creates new distribution options for those adversely impacted by coronavirus, expands the availability of plan loans, and waives required minimum distributions for most retirement plans for 2020. Early Distributions. Pursuant to Section 2103(a) of the CARES Act, the 10% early distribution penalty tax under I.R.C. Section 72(t) that would otherwise apply to the majority of distributions made before a participant turns age 59 1/2 is waived for "coronavirus-related distributions" (CRD) made at any time during 2020 from qualified retirement plans for distributions of up to $100,000. The distribution option is permissive, not mandatory, for eligible plans such as IRAs, 401(k)s, 403(a) and (b) plans, and 457 plans. A CRD is a distribution from an eligible retirement plan made during 2020 to a qualifying individual who is diagnosed with coronavirus, or whose spouse or dependent has been diagnosed with it, or who has experienced adverse financial consequences from a coronavirus-related quarantine, furlough, layoff, work reduction, business closure or reduction in hours (for business owners) or an inability to work due to lack of child care related to coronavirus. The distributions will be subject to income tax, but the qualifying individual may opt to spread the payments evenly over three years rather than having to pay it all in 2020. The participant may also recontribute the distributed funds to the retirement plan or another retirement plan (with an exception for 457 plan distributions), by a single rollover or multiple rollovers, within three years of the date of the distribution regardless of any contribution limit established by the plan. Loans. During the 180-day period from the date of enactment of the CARES Act, plans can increase their loan limits to the lesser of $100,000 or 100% of the participant's vested account balance for qualified individuals, up from the previous limits of $50,000 or 50% (note that loans are not permitted from IRAs) for participants adversely affected by coronavirus as discussed above. Qualified individuals with an existing loan from a retirement plan that is due to be repaid by December 31, 2020 can delay repayment by one year. Later repayments will be adjusted to reflect the delayed due date plus interest accruing during the delay. In addition, the one-year period of delay in repayment is disregarded in determining the maximum five-year loan period. Required Minimum Distributions. For participants in 401(k), 403(a) and (b) plans, 457, and IRAs (not defined benefit plans), the CARES Act waives required minimum distributions (RMDs) for the calendar year 2020. Under the new SECURE Act, effective January 1, 2020, retirees are typically required to take an RMD from their plan upon reaching age 72. The CARES Act waiver also applies to RMDs for retirees who reached age 70 1/2 in 2019 but deferred taking an RMD in 2019 until April 1, 2020. Normally, retirees in this category would also have to take a second RMD for 2020 by December 31, 2020, but this RMD is waived as well. Although those who have already taken an RMD for 2020 are not allowed to repay it into their retirement plan, they are permitted to roll it over into a new IRA within 60 days of the distribution, allowing them to avoid paying income tax on the RMD. The waiver is also applicable to designated beneficiaries who have inherited retirement accounts. Further, 2020 is not counted for purposes of the post-death payout "five-year rule" applicable to non-designated beneficiaries when the owner died before his or her own required beginning date. However, the CARES Act has no impact on the new 10-year payout rule required by the SECURE Act, which precludes most non-spousal beneficiaries from stretching their distributions over their lifetime, as 2020 is the first year that non-eligible designated beneficiaries would be subject to that rule when they inherit a retirement account. Because the 10-year payout does not start until the year after the year in which the account owner died, 2021 counts as year one rather than 2020. Note: The CARES Act does not affect the ability of clients who are 70 1/2 years old to make an annual qualified charitable distribution (QCD) of up to $100,000 from his or her IRA directly to a qualified charity in 2020 without taking the distribution into taxable income. However, the suspension of RMDs reduces the incentive for doing so because the distribution will not offset the client's RMD, thus enabling the client to avoid taxable income. However, a QCD will reduce clients' taxable IRA balance, so it will still provide a tax benefit to them. Further, under the CARES Act, for 2020, individuals who itemize their deductions can elect to deduct up to 100% (up from 60%) of their adjusted gross income for cash charitable contributions, so if clients choose to take a cash distribution from their IRA and contribute that cash to a qualified charity, they can potentially completely offset the tax attributable to the distribution using the charitable deduction.
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