The CARES Act (Coronavirus Aid, Relief, and Economic Security) Act that President Trump signed into law on March 27 is known by most Americans as “the stimulus check bill.” The Act is intended to put cash into the pockets of the citizens, business, and small governments that need it most right now. And indeed, they cannot get here soon enough. A recent survey from SimplyWise found that 40% of Americans have had their income reduced because of the fallout from COVID-19. Of those who have lost their jobs, 43% are not confident they will be employed within the next three months.
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Yet despite the great relief brought by the stimulus checks, the Act also offers other forms of financial support for Americans that are not yet as widely known. Namely, it gives individuals greater access to the funds in their retirement savings accounts. Many young people might gloss over this part of the legislation, as these retirement-related provisions of the CARES Act are buried under the news about the stimulus checks. Yet the Act makes it easier, and less costly, to tap retirement accounts for cash. So understanding what is on offer - and how it could impact your long-term savings - can potentially help your finances today. We outline the most important parts of the legislation for your retirement savings below.
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The Impact Of The CARES Act On Your Retirement Savings
1. Tax relief on retirement plan withdrawals
The CARES Act waives the typical 10% penalty on withdrawing from your retirement account before you are 59 ½ years old. That means that withdrawals from your 401k of up to $100,000 are now not subject to the normal 10% fee. This is true for all distributions made to an individual from a retirement account from Jan 1, 2020 to Dec 31, 2020.
The withdrawals can later be repaid to the retirement account over a three-year period, and those repayments will be treated as a tax-free rollover, and will not be subject to the annual contribution limits of your plan.
Any distributions that are not repaid in that three-year period can be taxable income -- however, the amount can be included in your income and taxed ratably over three years.
The one caveat here is that the withdrawals are technically limited to “affected individuals” by COVID-19. To qualify, you must fall within one of two categories. Either you, your spouse, or a dependent has been diagnosed with COVID-19. Or, you must have experienced adverse financial consequences related to the virus, including: being quarantined, furloughed, laid off, or having hours reduced; being unable to work due to lack of child care; or being unable to work due to the current closures or reduced hours.
2. Loans from your retirement plan
The CARES Act also changes how much you can take as a loan from your retirement plan. Typically, the limit for loans from qualifying retirement plans is $50,000. However, the new bill allows for loans up to $100,000 or 100% of the participant’s account balance (whichever is less). These loans will be available from March 27, 2020 through September 23, 2020.
Moreover, the Act also makes it so that loans from qualified retirement plans that come due between March 27, 2020 and December 31, 2020, now have their payment due date delayed one year.
3. Waiver of required minimum distributions
People who participate in a retirement plan or have an IRA are typically required by tax rules to take a required minimum distribution (RMD) starting on April 1 of the year they turn 70 ½.
The CARES Act, however, temporarily waives RMDs for all of 2020. This applies to anyone who has either already begun taking RMDs or who was required to start taking them in 2020. Unlike the retirement savings withdrawals, the RMD waiver is not restricted to individuals who have been affected by COVID-19, and so applies to everyone.
Moreover, the Act extends the period over which distributions must be made due to an employee’s or IRA owner’s death by one year.
This is a great relief in that it translates to not being forced to liquidate your investment accounts at a time of extreme volatility.
Should I take a 401k loan or withdrawal?
The CARES Act certainly provides great relief for anyone who has a retirement savings account today. However, the decision to take a loan or withdraw from your retirement account is one that should be considered carefully, as it can impact your future savings. If you are in the middle of true financial hardship, then you may have no choice, and that is fine - it’s why you save.
But if you have other options, it may be worth thinking twice. Some financial advisors are recommending that a loan is better than a withdrawal; others say that taking money from your retirement savings in any form essentially equates to borrowing from your future self, because the cash you take today won’t have the opportunity to compound and grow over time. Whatever decision you make, it is prudent to review your plan with a financial advisor so that you take the right step for your own personal financial situation.
This is certainly an uncertain time. Across the country, Americans are struggling, from health issues, to unemployment, to extreme isolation, and beyond. Many are financially strapped. In fact, despite the fact that the checks have yet to be sent out, our latest survey revealed that 63% of Americans would need another stimulus check within just 3 months.
While this time at home can be isolating, use it as an opportunity to educate yourself about the financial choices you have for today, and to think about how those decisions will impact your future and retirement. Understanding your financial options - from your social security benefits (including spousal and survivor’s benefits) to refinancing debt, to part-time or remote work and far beyond - will help ensure you stay on track for your long-term goals, despite the current uncertainty. Saving and retirement planning is something you do for life. With plenty of resources online to help you prepare, when this crisis is over, you will be able to get back to living your life.