Except for the few who were born around 1918 during the height of the influenza epidemic, we’ve never encountered such a public health crisis as COVID-19. I truly hope you and all your family members are safe and healthy. And, that you are making a successful transition to your “new normal.” From my home office, I can say that my family is well and we’re slowly figuring out what our modified daily living is going to look like.
We’ve also never seen such aggressive action by the Federal Reserve and Congress to address an economic crisis. The speed at which new laws are rolling from the hallowed halls in Washington is making heads spin. The laws that are enacted are over 900 pages. That’s a lot of information to sift through and figure out. In this post, I’m going to focus on the Coronavirus Aid, Relief, and Economic Security, or CARES Act and retirement accounts. If you are interested in a full summary of the 900 pages, I suggest an article from Jeffrey Levine on the Nerd’s Eye blog. It is pretty technical, but includes a number of examples to help understand some of the nuances of the CARES Act.
Seems like just yesterday it was the SECURE Act
You may recall my blog from February that started out as follows:
When it comes to retirement account distributions rules, nothing is easy. And, things just got more complicated. At the end of 2019, the budget bill had a surprise provision in it: The SECURE Act was tacked on at the end. It passed, lock, stock and barrel. Changes in the SECURE Act and required minimum distributions (RMD) were unexpected. For the next couple of years the new rules may confuse anyone who is age 70 or 71 or 72. And, the law may change your plans for retirement withdrawals.
Maybe I should have procrastinated before writing that blog. That’s because just a few weeks later, the CARES Act made even more changes to your retirement accounts.
Required Minimum Distributions for 2020
The CARES Act essentially negates the SECURE Act when it comes to Required Minimum Distributions (RMDs) for 2020. There was a lot of confusion and multiple if/then situations for those who were turning 70 ½, 71, and 72 in 2019 or 2020 under the SECURE Act. Who had to take a 2019 RMD? Who had to take an RMD in 2020? Could you just skip a year? And so on.
Now, thanks to the CARES Act, no owner of an IRA, a 401(k), a 403(b), etc. has to take an RMD in calendar year 2020. At all. (This does not necessarily apply to beneficiaries of a deceased person’s IRA.)
You can still take withdrawals from your retirement accounts if that is what you are using for income to pay your bills. You can even continue to take out the amount that would be considered an RMD every month, quarter, or year. It’s just that you no longer have an IRS requirement to do so in 2020.
Are taxes due on withdrawals from retirement accounts?
Yes. Any amount you pull from your retirement accounts in 2020 will still be subject to ordinary income tax. Just because the RMD has been waived for the year does not mean taxes are waived if you choose to withdraw money from your retirement accounts.
What is interesting in the CARES Act, however, is that you may be able to return a Required Minimum Distribution back to your IRA or retirement plan. So long as you can return the money within 60 days from when you took it out. This is called a “60-day rollover” and each person is allowed one 60-day rollover every 12 months.
Under normal circumstances, not all withdrawals are allowed to be rolled back into the same or another a tax-advantaged account. IRS rules are very clear that Required Minimums are NEVER allowed to be rolled back. So, it was very interesting that the CARES Act specifically lifted this forbidden transaction.
That means, if you are in your 70s or older, and you didn’t want or need the money you just pulled from your IRA as all or part of your RMD, you can probably return it. You get a do-over! So long as you took the money out less than 60 days ago.
More information on the CARES Act and retirement accounts
Waiving required minimums in 2020 is not the only change from the CARES Act and retirement accounts. If you, or your spouse, or a dependent gets diagnosed with COVID-19, or if you are among the 25 million-plus who are now unemployed or have lost childcare, you have more access to your IRA and retirement plan money. When you meet a COVID-19 qualifying reason, you can withdraw up to $100,000 from your IRA and/or employer retirement plan with certain tax advantages. If you:
- are younger than 59 ½ , you will not have to pay the usual 10% early withdrawal penalty.
- withdraw from an employer plan, the employer will not have to meet the 20% mandatory Federal withholding requirement. That means you’ll receive 100% of the amount you request.
- tap your IRA or retirement plan just to tide you over, you’ll be able to return all or part of the money you pull out over 3 years.
- take a distribution in 2020, you’ll have 3 years to pay the income tax you owe. Your distribution will be split evenly into thirds for tax years 2020, 2021, and 2022.
IRAs include Traditional IRAs, SEP-IRAs and SIMPLE-IRAs. Employer plans include 403(b)s, 401(k)s, Governmental 457(b)s, and The Federal Thrift Savings Plan. If you need to take a withdrawal from an employer plan, check with your HR or Benefits group about the details.
Think twice before tapping that retirement money
Having access to your retirement savings may be the stop-gap measure you need right now. But, let me offer a note of caution: please keep in mind that when you’re 80 you’re going to need this money. You won’t have options at that point to find a new job or to file for unemployment.
So, consider every option you have to keep food on the table and the mortgage paid. There is no shame in applying for unemployment insurance – you’ve been paying into your state’s fund with every paycheck. You just don’t see it. As a small business owner, I do see how much I pay into both the state’s UI fund and the Federal fund. That money is there for you when you need it. Now may be that time.
If you do have to tap your retirement money early, keep in mind that you can repay it over the following three years. And, you’ll be able to amend your tax returns as well.
Small Businesses and the CARES Act
One side-note here about small businesses. The CARES Act (part 1, part 2, future parts 3, 4, 5…) does recognize the horrendous situation that millions of small businesses are facing. It’s one thing for a business to close in your town every so often. But, it’s tragic to see every small business for blocks and blocks with “We’re CLOSED” signs that popped up overnight.
Congress has moved in the right direction to help small businesses maintain payrolls. It’s complicated and always so political. But, it’s a step in the right direction during this incredibly abnormal era we’re living in.
There are two funds specific for small businesses: the Paycheck Protection Program and the EIDL – Economic Injury Disaster Loan. These funds have been paid out to some small businesses, and a lot of very large companies, due to loopholes in the new law. But, again, the idea is going in the right direction. If you have any kind of small business, now is the time to explore these loan options.
One local small business owner makes a strategic shift
What I find most inspiring is how creative small businesses have become, thinking outside the box. Restaurants come to mind first. Many have embraced take-out and delivery. And so many are incredibly generous in providing meals for health care workers and fellow citizens in need of a meal.
One small business owner in my area, Abbi Hatton of DoggSpot Designs, is part of the Plymouth Area Chamber of Commerce. Abbi has this fun doggie accessory shop and she sews cute bandanas and furniture coverings for pets. Most of her revenue typically comes from crafter exhibits and big events like “Bark in the Park.” All of those options are shut down this year, and people aren’t buying as many cute things for their puppies.
To fill her time as the new reality set in, Abbi started sewing masks for the Plymouth hospital. That volunteer activity turned into a new arm of her business: cloth masks in designer fabrics for non-medical use.
For all of us who can’t even sew on a button, and who didn’t want to wear industrial masks from Home Depot, it’s Abbi to the rescue! She exemplifies small business creativity, problem-solving, and filling an unexpected need for consumers. Check out her online shop and support her small business or one in your local area.
I wish you health and happiness as we wrestle this nasty, novel virus to the ground.
Resources for the CARES Act and retirement accounts
The IRS makes it very clear which types of distributions are allowed to be returned to tax-advantaged IRAs or retirement plans. RMDs are never allowed…except this year thanks to the CARES Act.
For good information on the Small Business loans, try your local Chamber of Commerce or the SBA.
And, don’t forget to check the various financial institutions where you have your IRAs. They should have current information about access to your retirement accounts and prepared to answer your questions. For example, Fidelity Investments has a comprehensive COVID-19 center, and Bank of America and MerrillEdge are doing a good job showing how to stay more secure online.