This will be the first in a series of articles detailing the Coronavirus Aid, Relief, and Economic Security Act, also known as the CARES Act, and how it might affect you.
Tax Penalty Waived
- Distributions related to COVID-19 from eligible retirement plans are not subject to the 10% tax on early distributions. These distributions must be made after Jan. 1, 2020 and before Dec. 31, 2020, for coronavirus-related purposes. A coronavirus-related distribution is a distribution made to an individual: (1) who is diagnosed with COVID-19, (2) whose spouse or dependent is diagnosed with COVID-19, or (3) who experiences adverse financial consequences as a result of being quarantined, furloughed, laid off, having work hours reduced, being unable to work due to lack of child care due to COVID-19, or the closing or reducing hours of a business owned or operated by the individual due to COVID-19. These rules appear loose and require the plan sponsor to rely solely on the employee’s word for their eligibility.
- These distributions may not exceed $100,000 or 100% of your vested account balance.
- Amounts distributed may be repaid at any time over three years, starting on the date the distribution was made to avoid taxes. As with anything having to do with taxes, the mechanics of this will depend on the guidance given by the IRS.
- Traditional pensions are not covered by this waiver.
Required Minimum Distributions (RMDs)
- The required minimum distributions (RMDs) from certain defined contribution plans and individual retirement accounts are waived for 2020.
- This includes Inherited IRAs
Loans from Qualified Retirement Accounts
- You can now borrow up to $100,000 (up from $50,000) or 100% of your vested account balance.
- You can pay back over five years.
- If you have an existing loan outstanding, your payments can be stopped and extended for one year.
- These provisions will only apply from March 27, 2020, for 180 days or until approximately Sept. 30, 2020.
Things to Consider Before Acting
- Should I stop taking my RMD? The general answer is yes. However, you do need to look at what your AGI or tax bracket will look like toward the end of the year. This is the year to have a tax projection done. If it turns out that you are in a significantly lower tax bracket for the year, then you may want to consider pulling some or all of your required withdrawal.
- Should I take a loan against my qualified retirement account? The general answer is no unless it is the last resort. If you are following our Ten Year Rule, then you should not need this money for 10 years.1 When you borrow from your qualified retirement account, generally, the plan sponsor will sell assets to raise the money needed to cover your loan. We are currently in a depressed market. If you sell out now, you are locking in those losses. If the market recovers, you would have lost out on that upside. No one knows what the future holds, but I am loath to lock in losses if I can just ride out the storm.
- Should I take a distribution from my retirement account? The general answer is no. Again, I would generally say only do this as a last resort. However, this option comes with a unique planning scenario. Based on our reading of the law, you can pull $100,000 out now without penalty. You have the option of paying it back within three years to avoid the taxes. Essentially, it is an interest-free loan for three years. The trade-off is you are taking the money out of a tax-deferred account to do something else with it.
Again, as with everything, there is no one-size-fits-all answer. There are planning opportunities around the new CARES Act. We are all individuals with unique circumstances that require customized planning. That’s what we do. We help you Live Ready. Rest assured Henssler Financial will be here to help—you are not alone.
If you have questions or need assistance, contact the Experts at Henssler Financial:
- Experts Request Form
- Email: experts@henssler.com
- Phone: 770-429-9166
- Join the Conversation in Our Coronavirus Facebook Group
1: Henssler Ten Year Rule: Any money you need within the next 10 years to cover spending needs should be placed in fixed-income investments held to maturity to protect principal. Money not needed within 10 years should be invested in growth investments such as individual stocks or mutual funds that invest in stocks. The basis for this rule is to eliminate the need to sell stocks during a depressed market to cover spending needs.
Disclosures: The investments referenced within this article may currently be traded by Henssler Financial. All material presented is compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. The contents are intended for general information purposes only. Information provided should not be the sole basis in making any decisions and is not intended to replace the advice of a qualified professional, such as a tax consultant, insurance adviser or attorney. Although this material is designed to provide accurate and authoritative information with respect to the subject matter, it may not apply in all situations. Readers are urged to consult with their adviser concerning specific situations and questions. This is not to be construed as an offer to buy or sell any financial instruments. It is not our intention to state, indicate or imply in any manner that current or past results are indicative of future profitability or expectations. As with all investments, there are associated inherent risks. Please obtain and review all financial material carefully before investing. Henssler is not licensed to offer or sell insurance products, and this overview is not to be construed as an offer to purchase any insurance products.
