Coronavirus Legislation and Your Retirement Funds
While it may be unpleasant to think about your 401(k) or IRA right now, you should know about changes COVID-19-related legislation has made to rules regarding tax-advantaged retirement accounts.
Early withdrawals: It’s usually a bad idea to raid a pretax retirement fund early. On top of using funds you may need in your golden years, you typically pay a 10 percent penalty, plus income tax on the amount you withdraw.
But the third stimulus package, the Coronavirus Aid, Relief and Economic Security (CARES) Act, allows individuals to take up to $100,000 in early hardship withdrawals (related to the virus) without incurring a penalty. If your situation improves, you have three years to return the funds to a qualifying retirement account without owing taxes. If not, the taxes may be spread over three years.
Of course, the lack of a penalty and less painful tax implications need to be weighed against potentially realizing market losses by withdrawing now and losing growth opportunities when investments rebound.
Loans from 401(k)s: The CARES Act increases the limit on loans qualified individuals can take from their 401(k) within 180 days after its enactment from $50,000 to $100,000. You may need to pay taxes on such a loan if you leave your company before it’s repaid.
Required minimum distributions (RMDs): Recognizing the loss senior investors could incur by having to take RMDs when the markets are depressed, Congress waived RMDs for 2020 for 401(k)s and IRAs. The Act even allows account owners who had not taken their first RMD for 2019 (which would have been due April 1) to defer RMDs for both 2019 and 2020. RMDs are also waived for beneficiary (inherited) retirement accounts for 2020.
Contributions: The Treasury moved the deadline for 2019 tax returns and payments from April 15 to July 15. It also moved the deadline to make 2019 contributions to IRAs and Health Savings Accounts to July 15. Contributions to workplace retirement accounts are not impacted.
Need help? It’s important to talk with a professional before employing any new retirement account strategies. We’ll be happy to work with you and your tax professional to help you find a solution for your situation.