Retirement Account Rule Changes

Retirement Account Rule Changes

April 2, 2020

By Matthew E. Miller, CPA, MBA

On Friday, March 27, 2020, Congress passed and the president signed a $2T multi-purpose stimulus package (CARES Act).  Over the next several days, we will send out brief one topic newsletters to inform you of important changes to filing and payment dates, as well as, tax law changes effecting the 2019 and 2020 tax years.

The IRS has set up a special Coronavirus page on its website with up to date information.

To read all of our articles on the stimulus package, please visit this page on our website.

Retirement Accounts

In response to the Coronavirus pandemic, and the resulting impact on global markets, the CARES Act contains a number of important changes to rules pertaining to retirement plans.

Contribution Dates

To match tax return filing dates, the annual contribution date for IRAs has been extended from April 15, 2020 to July 15, 2020. Contributions to other qualified retirement plans have also been extended to July 15th, or if the corresponding tax return has been extended past the original filing deadline, the contribution due date will be the extended due date. These plans include self-employed pension plans (SEPs), employer contributions to 401(k) plans, and defined benefit plans.

Required Minimum Distributions

For taxpayers who are subject to annual required minimum distribution requirements from their traditional retirement accounts, those payments have been suspended for 2020. The purpose of the deferral is to allow retirees the opportunity to leave important retirement plan dollars in the accounts and in the markets in an effort to stabilize the investment sectors and to recover some of their losses in their retirement accounts.

Withdrawals from Retirement Plans

To help taxpayers during this financially difficult time, Congress has made temporary changes to withdrawal and borrowing rules for employee retirement accounts.

Individual Retirement Accounts

Taxpayers may withdraw up to $100,000 from Individual Retirement Accounts to pay the cost of coronavirus-related distributions. These distributions may be made in the form of a loan or a taxable distribution.

Retirement Plan Loans

In General – Any individual who receives a coronavirus-related distribution may, at any time during the 3-year period beginning on the day after the date on which such distribution was received, make 1 or more contributions in an aggregate amount not to exceed the amount of such distribution to an eligible retirement plan.

You make not recontribute more than the original coronavirus-related distribution amount.

Taxable Withdrawal

At the election of the taxpayer, the withdrawal may be treated as a distribution and will be included in income over 3 years beginning in the year of distribution. If you are under 59 ½, these taxable distributions will not be subject to the 10% penalty for the early withdrawal.

Coronavirus-Related Distribution

The term “coronavirus-related distribution” means any distribution from an eligible retirement plan made –

I. between January 1, 2020 and December 31, 2020, and
II. to an individual –

A. who is diagnosed with the SARS virus or the COVID 19 virus,
B. whose spouse or dependent has been diagnosed with the virus, or
C. who experiences adverse financial consequences as a result of –

i. being quarantined,
ii. being furloughed or laid off or having work hours reduced due to such virus or disease,
iii. being unable to work due to lack of childcare due to such virus or disease,
iv. closing or reducing hours of a business owned or operated by the individual due to such virus or disease, or
v.other factors as determined by the Secretary of the Treasury (IRS).

Qualified Employer Plans

If your employer plan allows, individual participants may borrow up to $100,000 or 100% of their vested plan balance, whichever is less, as a coronavirus-related distribution. The CARES Act significantly relaxes loan provisions of qualified employer plans. There are many details to be worked out by regulators, but here is what we know now.

A coronavirus-related distribution may be made during the period beginning March 27, 2020 through September 23, 2020 (a 180 period). This is shorter than the rules for IRAs.

The loan must be repaid over 60 months beginning one year after the distribution. These loans are not eligible for the 3-year income inclusion election. Presumably, if you fail to repay the loan, the defaulted balance is taxable in the year of default.

You make not recontribute more than the original coronavirus-related distribution amount.

Our Plans

We will republish this article as updated information becomes available. If you need to make a coronavirus-related related withdrawal from your IRA or qualified retirement account, we urge you to contact your financial advisor or employer retirement plan administrator.

Our wishes to you and your family for your health and safety.