What You Need to Know About the Impact of the CARES Act on Your Retirement Plan

Finance | Provided by Cornerstone

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Waiver of Required Minimum Distributions (RMD) for 2020

You do not need to take your RMD (required minimum distribution) for the 2020 calendar year effective January 1, 2020, which means you can avoid taxable income this year if you don’t need it. While the Act does not contain language to allow you to repay a RMD you have already taken this year, you may be able to add the funds back as long as you do so within 60 days of the distribution by treating it as a rollover distribution. Keep in mind that you are only allowed one rollover per 12-month period.

ROTH IRA Conversion and the SECURE Act

If you don’t need the cash flow and can afford to pay the tax, consider a ROTH IRA conversion. In particular, if your children will be inheriting a larger IRA from you, a ROTH will help alleviate the tax burden on them created by the SECURE Act passed at the end of last year. The SECURE Act requires that an inherited IRA be distributed to your adult children fully within 10 years. Before the Act, the inherited IRA could be distributed (and taxed) over their life expectancy.

Animated women hugging earthRMD Five-Year Distribution Rule

The RMD waiver includes distributions required under the five-year distribution rule. The five-year distribution rule applies to retirement accounts that are inherited by a non-designated beneficiary, which is defined as any beneficiary whose life expectancy cannot be determined, such as an estate, some types of trusts, and a charity. If an account is paying out per the five-year rule, the 2020 distribution can be skipped. This means the account can now pay out over six years.

Withdrawals up to $100,000 From Retirement Accounts Not Subject to 10% Penalty

If you are affected by the coronavirus, you can now can take a coronavirus-related distribution of up to $100,000 from a retirement account without paying the 10% penalty, but the distribution is still subject to income tax. A coronavirus-related distribution must be made in 2020 to an individual who is diagnosed with COVID-19 by an approved test, or has a spouse or dependent diagnosed, or who experiences adverse financial consequences.

You can then repay to your account over a three-year period and avoid the tax, or you can keep the distribution and spread the income tax over a three-year period.

Our friends at Perkins Coie advise that a plan is not required to offer this distribution option, so be sure to check in with your employer if you are considering this option.

We recommend considering this option only as a last resort.  Pulling out assets means locking in any losses in your retirement account and then losing out on a potential recovery.

Masked woman coronavirusLoans From Retirement Accounts Increased to up to $100,000

The amount that can be taken from a retirement account through a loan has doubled to $100,000 for those who have been affected by COVID-19. The amount was previously $50,000 and a loan was limited to 50% of the vested plan balance. The limit is now 100% of the vested balance.

You can also delay payments on plan loans for 2020.

We also recommend considering this option as a last resort. While you do repay yourself, you will be doing so at a low interest rate during a time when a potential market recovery could exceed that return.

Other Changes to IRA Accounts for 2020

Also of note, and a change outside of the CARES Act, the IRS has extended the 2019 IRA contribution deadline to July 15, 2020.

If you have any questions, we are here for you. Please reach out to your client manager or info@buildbeyond.com.



*The information contained in this communication is not intended to be, and should not be construed as investment, legal or tax advice.  The information is subject to change, and although based upon information that Cornerstone Advisors, Inc. (“Cornerstone”) considers reliable as of the publication date of this communication, it is not guaranteed to be accurate or complete.  Furthermore, Cornerstone has no obligation to update the information contained herein.