CARES Act 2020: What Is a Coronavirus-Related Distribution from Your Retirement Account?
The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) offers financial assistance and temporary support to Americans affected by coronavirus lockdowns, layoffs and furloughs, in an attempt to help Americans deal with the economic impacts of the coronavirus pandemic.
The CARES Act creates a new type of retirement savings withdrawal from qualified retirement plans called a “coronavirus-related distribution” (CRD), and also eases the rules for taking loans from qualified retirement plans.
What is a CRD?
A CRD provides qualified individuals affected by the coronavirus access to retirement savings that typically would be inaccessible, or would otherwise be subject to early withdrawal penalties.
Qualified individuals may withdraw up to $100,000 (in the aggregate) from their qualified retirement plan accounts without paying penalties for early withdrawal or having federal income tax withheld.
Anyone who meets one of the three criteria described below is eligible to receive a CRD. You can take a CRD if you:
- are diagnosed with COVID-19 or SARS-CoV-2 by an approved test,
- have a spouse or dependent who is diagnosed with COVID-19 or SARS-CoV-2 by an approved test or
- experience related adverse financial consequences because of a quarantine, layoff, furlough, reduction in hours due to the coronavirus, being unable to work due to lack of child care due to the coronavirus, or because of the closing or reducing hours of a business owned or operated by the individual or other factors as determined by the Secretary of the Treasury.
If you’re eligible, then you may be able to withdraw funds from qualified retirement plans, such as a 401(k) plan, 403(b) plan or individual retirement account (IRA). However, exceptions may apply. For example, if your company’s retirement plan chooses not to adopt CARES Act rules, then you won’t be able to take a coronavirus related distribution from that plan. Individuals should check with their plan sponsors regarding available CARES Act relief.
CRDs are different from hardship distributions or other distributable events.
The rules for CRDs are more lenient than typical rules for plan hardship withdrawals or other distributable events. The table below offers a general summary of the differences between the two types of withdrawals.
*such as purchasing or preventing foreclosure of a principal residence, medical care expenses or funeral expenses for the employee, spouse or dependent and certain education related expenses. Plan sponsors may allow withdrawals for other reasons.
** In general, exceptions include becoming permanently disabled, incurring medical debt equal to more than 10% of adjusted gross income or paying an IRS levy.
The material in this blog is presented for general informational purposes only and does not constitute tax or legal advice. Rules regarding coronavirus related distributions are newly enacted, and limited guidance exists and is subject to change. Speak with your tax and financial advisors to ensure you understand the coronavirus related distribution rules and how they may affect your particular situation.
Know the pros and cons of CRDs.
The new rules make it easier for Americans to withdraw money from qualified retirement plans, but that doesn’t mean they all should.
Individuals should check with their plan sponsors regarding CARES Act relief and think carefully about withdrawing funds set aside for retirement. The economic impacts of the coronavirus pandemic are forcing individuals to make tough financial decisions but before you tap into your retirement savings, consult your tax and financial advisors to carefully evaluate whether a CRD or an enhanced plan loan is the best option for you.
The CARES Act may create a once in a lifetime opportunity to transfer savings from one qualified plan account to another without creating burdensome tax consequences. For instance, if you have substantial assets in a qualified retirement plan, but your health savings account (HSA) is underfunded, a CRD creates an opportunity to move money into the HSA. Alternatively, if you would prefer to have tax-free income during retirement but haven’t been able to convert a traditional IRA to a Roth IRA because of tax considerations, this may be your chance. Talk with your financial and tax advisors about coronavirus CARES Act relief to understand the pros and cons and implications before taking action.
Ultimately, unless you have an immediate financial need that cannot be satisfied using other available savings, or are improving your long-term retirement savings plan, it may be best not to touch your retirement savings and remain focused on long-term financial goals.
A withdrawal can have a huge impact on retirement readiness. For instance:
- If the money is not repaid, it is permanently removed from the account, and that may jeopardize your ability to retire comfortably.
- If account assets have declined in value, taking a distribution locks in the losses now, rather than waiting for the markets to improve.
- If the market improves, you miss out on any gains because the money isn’t invested.
- The distribution is not invested and is not earning compound interest. As a result, you may have less money for retirement than you would have otherwise.
A good rule of thumb is that withdrawing savings from retirement accounts should be a last resort.
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The material in this blog is presented for general informational purposes only and does not constitute tax or legal advice. Millennium Trust Company performs the duties of a directed custodian, and as such does not sell investments or provide investment, legal or tax advice.