Individuals who find themselves short of cash due to the economic disruption of the COVID-19 pandemic may find relief in their retirement savings. The CARES Act (Coronavirus Aid, Relief, and Economic Security Act) includes a provision that eases restrictions on distributions from certain tax-qualified retirement plans, including 401(k), 403(b), tax-sheltered annuity plans, and IRAs.
Prior to the CARES Act, any distribution made prior to age 59-1/2 triggered a 10% early withdrawal tax. The CARES Act waives the early withdrawal tax for a “coronavirus-related distribution” of up to $100,000, so long as it is made prior to December 31, 2020.
What qualifies as a “coronavirus-related distribution”? Any distribution from a tax-qualified retirement plan made to an individual:
- Who was diagnosed with the virus SARS-CoV-2 or with COVID-19 by a test approved by the Centers for Disease Control and Prevention;
- Whose spouse or dependent is diagnosed with such virus or disease by such a test; or
- Who experiences adverse financial consequences as a result of being quarantined; being furloughed or laid off, or having work hours reduced due to such virus or disease; being unable to work due to lack of child care due to such virus or disease; closing or reducing hours of a business owned or operated.
In addition, under the CARES Act, no minimum distribution is required for calendar year 2020 from an IRA or from an employer-provided qualified, defined contribution, retirement plan that is a tax-qualified plan. The next required minimum distributions (RMD) for these plans will be for calendar year 2021.
The provision also waives the 2020 minimum distribution requirement for lifetime distributions to employees and IRA owners and for after-death distributions to beneficiaries. This RMD waiver also applies to any deferred 2019 RMDs due April 1, 2020. Taxpayers who have already taken their RMD for 2020 may be able to return that payment. If the RMD was taken within 60 days, it can be rolled back into the IRA with no tax cost or penalty.
Tapping into a retirement account should not be done without consideration of all aspects of how the move might impact future retirement income, as well as tax implications. For additional information please contact Gray, Gray & Gray at (781) 407-0300.