The Coronavirus Aid, Relief, and Economic Security (CARES) Act was recently signed into law. Included in the $2 trillion emergency relief package are special provisions for coronavirus-related distributions and loans, and certain required minimum distributions from retirement funds have been suspended to help investors preserve their retirement plans.
The prepayment penalty that generally applies to early distributions from an employer or individual retirement accounts is waived for coronavirus-related distributions of up to $100,000 during 2020. The income from the distribution can be spread over a 3-year tax period, and the distribution can be paid back to an eligible retirement plan within 3 years.
Or, you may be able to take out a coronavirus-related loan before September 22, 2020 of up to $100,000 with more lenient restrictions than usual or choose to repay certain existing loans later than scheduled.
The "coronavirus related" provisions apply to anyone diagnosed or who has an immediate family member who has been diagnosed, as well as those who experience adverse financial consequences as a result of the pandemic. This could include quarantines, furloughs, or business closing.
While these terms may sound attractive, what could the impact to your future be? Consider that you may be withdrawing funds at their lowest values in years, and what growth you may be missing over the 3-year repayment period. And, while there may be no prepayment penalty on a distribution, you will still have to pay income taxes on it. Distributions and loans can drastically affect your future retirement.
On the other hand, those who are required to take minimum distributions from their traditional IRAs or retirement plan accounts will get a reprieve this year. The CARES Act suspends RMDs from IRAs and defined contribution plans (other than Section 457 plans) for 2020. If you don’t need the funds from your required minimum distribution and you’re not making a qualified charitable distribution, this may help to preserve your retirement savings.
We recommend that you consult a professional if you’re considering taking advantage of the CARES Act Retirement Plan Relief Provisions to be sure you’re not jeopardizing your plans for retirement. We’re here to help!
Laura Mickels has spent more than 30 years working for investors with both Wall Street and independent firms. CochranMickels Retirement Specialists provides personalized planning and investment services to individuals approaching and in retirement. These are the opinions of Laura Mickels and not necessarily those of Cambridge, are for informational purposes only, and should not be construed or acted upon as individualized investment advice.