How COVID-19 Has Changed the Rules On Retirement Accounts
It’s impossible not to see that the COVID-19 pandemic has drastically affected virtually all of our lives, with people feeling the detrimental physical and financial impacts on a global scale. Social distancing guidelines began in March, culminating in strict stay-at-home orders and limitations on businesses that still continue. It will be months or years before we understand all the effects to our lives, our health, and the economy.
At the same time, our personal finances have been affected to a greater or lesser degree. For those with retirement accounts, recent changes in the law offer some relief, highlighted here.
How the CARES Act Affects 401(k)s and IRAs
The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) modified some of the rules dealing with 401(k)s, IRAs, and other retirement accounts.
Required Minimum Distributions Waived for 2020
The CARES Act waives required minimum distributions (RMDs) from retirement savings accounts for the remainder of 2020.1 If you had planned to take money out of your accounts because you were required to, you can leave that money where it is. Retirees will now have a chance to let their money grow (and defer income tax) a little longer and, hopefully, recover some value lost during the COVID-19 pandemic.
Of course, if you still need to get money from your accounts, you can. But for those who don’t, this waiver can reduce your income tax bill. And if you’ve already taken an RMD in 2020, you may be able to return it.
Qualifying individuals can withdraw up to $100,000 this year from some retirement accounts, like 401(k)s, 403(b)s, or IRAs, before the age of 59½ without the typical 10% tax penalty. You can also spread the tax liability of this additional income, or return the money to your retirement account, over the next three years.
Only those impacted directly by the COVID-19 pandemic can take penalty-free distributions. Examples of qualifying individuals include:
- Those diagnosed with the virus or with COVID-19 using a CDC-approved test,
- Those whose spouse or dependent has such a diagnosis,
- Anyone experiencing financial distress as a result of the pandemic due to being quarantined, furloughed, laid off, having work hours reduced, or being unable to work due to lack of childcare,
- Business owners who need to cease operation or reduce hours,
- Any additional circumstance which the Treasury Secretary deems acceptable.
Withdrawing any amount early from your retirement plan is a decision that you shouldn't take lightly, as you are taking income away from your future retirement. And not all types of retirement plans are included in this penalty waiver. If you're considering this option, speak with your financial advisor first; they may be able to find alternatives that could work better for you.
IRA and Other Contribution Due Dates Extended
On March 21, 2020, the IRS and Treasury Department announced an extension for tax filing and payments; this means that Americans have until July 15, 2020 to file their federal tax return. This also means you now have three extra months to contribute money to your IRA (traditional or Roth) or your SEP for 2019, as well as your HSA. This could help reduce your tax liability for 2019.
What About Social Security?
COVID-19, as of mid-May, has had no impact on current Social Security benefits. If you’re already receiving Social Security or planning to file your claim soon, we don’t expect any changes in the immediate future.
However, we have seen several news and opinion items suggesting that the stunning level of unemployment will have important impacts on Social Security’s funding (which is supplied by payroll taxes). Whether or not this leads Congress to act, after decades of neglecting what’s widely believed to be a need for some measure of Social Security reform, remains to be seen.
Planning for and navigating retirement income is already a challenge. With the extra stress and confusion brought on by the COVID-19 pandemic, it helps to have a good grasp of your options. Your financial advisor can help you understand how these changes may have affected you, how to manage the uncertainties that remain, and what your best next steps can be.