Many of us are concerned about the coronavirus pandemic, not just for the health and safety of our loved ones and ourselves, but for our immediate financial security. If you have been affected by this crisis, you may be eligible for enhanced access to your retirement plan assets to help through these troubling times. You may qualify if you, your spouse or a dependent has been diagnosed with COVID-19, or if you have experienced adverse financial consequences due to furlough, quarantine, layoff, reduction in hours, inability to work due to lack of child care due to COVID-19, or closing of business/reduction of hours due to COVID-19.
New retirement plan distribution option
The CARES Act provides a new coronavirus-related distribution from your retirement plan account.
- You may withdraw up to the lesser of $100,000 or 100% of your vested balance.
- The mandatory 20% federal tax withholding is waived.
- The withdrawal is not subject to the typical 10% early withdrawal tax penalty if you are under age 59 ½, though regular income taxes will still be assessed.*
- Income gained from the withdrawal can be spread equally over the next three years for tax purposes in order to lower your immediate income tax burden.
- You will have the opportunity to recontribute the amount of your withdrawal to any retirement plan or IRA eligible for rollover contributions within the next three years. This will not affect your annual contribution limit for those plans. Your income for tax purposes will be reduced by the amount of the recontribution.
- This distribution must be requested by December 31, 2020.
- Note that these coronavirus-related distributions – or CRDs – are an optional benefit that may be made available by plan sponsors, so check with your company to see if your plan is offering this option.
Enhanced loan provisions
You may also have access to enhanced loan provisions.
- The loan limit has been increased to the lesser of $100,000 or 100% of your vested balance for new loans requested during a 180-day period starting on March 27, 2020 for qualifying borrowers.
- Loan repayments due between March 27, 2020 and December 31, 2020 can be delayed for one year. The loan’s repayment period can be extended for the same amount of time. Interest will accrue during this time.
Delayed required minimum distributions
- Required minimum distributions (RMDs) are waived for 2020 from IRAs and defined contribution plans like 401(k) plans. RMDs for 2019 received in 2020 are also waived and can be rolled back into a qualified plan to defer taxation.
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*Withdrawals of pretax contributions are considered taxable income. Withdrawals of Roth contributions are qualified if made after age 59 ½ and at least five years after the first Roth contribution. For nonqualified Roth withdrawals, investment growth is taxable. Refer to your Summary Plan Description for more information. This is a summary of legislation; if there is a conflict between this summary and your 401(k) plan document, the plan document will govern.
The views and strategies described may not be suitable for all investors. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for accounting, legal or tax advice. References to future returns are not promises or even estimates of actual returns a client portfolio may achieve. Any forecasts contained herein are for illustrative purposes only and are not to be relied upon as advice or interpreted as a recommendation.
The views expressed are those of BerganKDV Wealth Management. They are subject to change at any time. These views do not necessarily reflect the opinions of any other firm. Investment advisory services and fee-based planning offered through BerganKDV Wealth Management, an SEC Registered Investment Advisor.