By Cheryl Winokur Munk
May 16, 2020
Between the Secure Act and the Cares Act, retirement savers and retirees are grappling with a number of changes designed to enhance the durability of savings as well as emergency provisions meant to ease coronavirus-related hardships. With so many people in desperate economic situations or confused about how the rules apply, here is a primer to help clarify some things retirement savers need to know.
Beginning this year, the age for required minimum distributions to begin for retirement-account owners increased to 72 years, from 70½, thanks to the biggest retirement overhaul since 2006. For those who turned 70½ in 2019, however, the first RMD was required to be taken by April 1, 2020—that is, until the Cares Act waived RMDs due in 2020.
The coronavirus-relief package temporarily waives RMDs this year, regardless of one's impact from the virus, from company plans like a 401(k) and 403(b) or individual retirement accounts. That's a welcome change for retirement savers who might otherwise have had to pay hefty taxes on portfolios that are down sharply from near-record highs of Dec. 31, 2019, the date by which RMDs for 2020 are calculated.
If you’ve already taken a distribution for 2020 and wish you hadn’t, you may be able to roll over the distribution to an IRA or eligible retirement plan. The caveats? It has to be within 60 days of the distribution (though the IRS extended the 60-day period to July 15, 2020, for distributions taken between Feb. 1 and May 15, 2020), the distribution can’t be from an inherited IRA, and you can do one 60-day IRA rollover per 12-month period.
If your account is set up to take these RMDs automatically, call your account custodian to request a change. There's nothing saying you can't take the distributions, if you so choose, but there's not much incentive to do so if you don't need the money.
The Cares Act allows certain individuals to withdraw up to $100,000 of IRA and 401(k) funds during 2020, penalty-free, if they meet certain conditions. Either they or their spouse or dependent has to have been officially diagnosed with coronavirus, or the plan owner has to have experienced "adverse financial consequences" because of the virus. This impact is defined as a result of being quarantined, furloughed, laid off, having work hours curbed, unable to work due to lack of child care as a result of coronavirus, closing or reducing hours of a business owned or operated by the individual due to the virus, or other factors as determined by the U.S. Treasury secretary.
Keep in mind that the "adverse financial consequences" provision refers to the retirement account owner's circumstances, not the spouse's. So a plan owner can't take a coronavirus-related distribution based on his wife being out of work, unless the wife has been diagnosed, says Ed Slott, an IRA specialist who is a certified public accountant in Rockville Centre, N.Y.
This provision eliminates for 2020 the 10% penalty for withdrawing before age 59Â½, as well as the 20% federal tax withholding on early 401(k) withdrawals for those impacted by the crisis.
Only use this as a last-resort, Slott says: "It's draining your own retirement savings."
If you do take advantage of this assistance, the Cares Act allows you to spread the tax you do owe over three years, Slott says. And if you pay back the full distribution amount within the three years, you can amend your tax returns and get all the money back that you paid in taxes, he says.
Borrowing From 401(k)s
Using the same eligibility requirements, the Cares Act doubles 401(k) loan limits for individuals eligible for a coronavirus-related distribution to the lesser of $100,000 or 100% of the participant's vested account balance. Availability is subject to each plan's rules on participant borrowing.
To qualify, the loan must be made by Sept. 22, 2020. The participant won't owe income tax on the amount borrowed from the 401(k) if it's paid back according to the loan terms. But be careful about these terms because otherwise it will be counted as a distribution.
Another perk: You get a year's reprieve from repaying existing loans due between March 27 and year's end.
Again, only people who are in desperate financial situations should consider a loan from a company retirement plan, Slott says. If you can't repay it you've depleted your retirement savings before you even retire, which can leave you in even rougher shape later on, he says.
Another caveat: Your total coronavirus-related distribution, across all retirement plans, cannot exceed $100,000. So if you take $75,000 from your IRA, you are now limited to $25,000 from your 401(k), Slott says.
Demise of the Stretch IRA
The Secure Act eliminated the popular estate-planning tool where a traditional IRA could be drawn down over a beneficiary's lifetime to minimize the tax burden. Now, most beneficiaries, including trusts, will have to deplete the account within 10 years, with a few exceptions. These exceptions are: the surviving spouse, minor children (but not grandchildren), disabled beneficiaries, chronically ill individuals, and beneficiaries who are up to 10 years younger than the account owner.
Without the stretch-IRA strategy , people could consider options like converting to a Roth IRA. You’d pay the taxes now and your heirs would still have to take distributions within 10 years, but they wouldn’t be saddled with hefty tax bills, Slott says.
Another option, for those between age 59Â½ and 72, is to withdraw the funds now, penalty-free, and use the proceeds to buy permanent cash value life insurance, which can double as a tax-free retirement savings account whose cash value you can access if needed, Slott says.
You'll still pay the tax now at ordinary income rates, but your heirs will get the life-insurance proceeds tax-free. People considering this option should factor into the amount of the tax bill and the cost of life insurance into their decision-making process.
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