Tranel Talks Column

The CARES Act Explained: Retirement Fund Access & More

The federal government has passed the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) in response to the Coronavirus pandemic that has disrupted economic growth throughout the world.

The CARES Act is an ambitious bill that will provide more than $2 trillion in economic relief to businesses and American citizens. The act also includes provisions that allow individuals to access their retirement assets without penalty, giving Americans additional options to mitigate the impact of the Coronavirus.

There are several important developments to this new law that retirees and retirement planners need to be aware of. Tyler Braun, a financial advisor here at The Tranel Financial Group, put together an informative webinar that breaks down some of the most important information.

1. Required Minimum Distributions Have Been Waived

Required Minimum Distributions (RMDs) have been waived for all qualified accounts subject to the requirement under the new CARES Act. This provision allows retirees to leave their retirement accounts, and their investments, alone for an additional year in an effort to let them recover from the recent market decline. This waive means individuals do not owe an RMD in 2020 and will not be required to take two RMDs out in 2021.

Prior to this new act, individuals over the age of 70.5 years (born before July 1, 1949) or those age 72 (born after June 30, 1949) would be required to make minimum distributions in any qualified account to ensure the IRS would receive their tax revenue.

Additionally, if 2019 was the first year that you were required to make a minimum distribution, you can waive that in addition to the year 2020 RMD.

2. Roth Conversions

This situation also presents a unique opportunity to convert traditional IRAs or 401(k) accounts into a Roth IRA account. Roth conversions are generally advised when individuals expect that their income tax bracket will rise prior to retirement, and today’s tax rates are low and expected to rise.

There are a couple of strategies to take that might make a Roth conversion an option for you.

First, timing a Roth conversion is crucial. Generally speaking, it’s recommended to convert at a low so you can capitalize on the gains tax free. As it stands now, most accounts are depressed, making it an ideal time to convert.

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It’s important to note that if you decide to convert, it’s not recommended not to withhold the taxes from the account. While this may not be for everybody, it could be advantageous during this marketing if you’re at a lower income level than your ordinary income and in a lower tax bracket as a result. That would mean you have to bring less money to complete the conversion without any withholdings.

The second method involves taking advantage of the waived RMD this year. If you were prepared to take the RMD—your taxes are set up for it and there are no real changes to your account—you can use the same strategy but instead of coding it for the RMD, you do a conversion into a Roth IRA for tax-free growth.

3. 401K Withdrawals With No Penalty

The CARES Act allows citizens to access their retirement assets from qualified accounts (IRA, 401(k), etc.) without penalty. Funds can be withdrawn from these accounts by requesting a Coronavirus Related Distribution (CRD), and individuals can withdraw up to $100,000. The CRD is supposed to be used only by those who have been affected by the Coronavirus (diagnosed with Coronavirus or suffering from an adverse financial situation such as job loss).

CRDs are not subject to the typical IRS 10% early withdrawal penalty for taxpayers who are under the age of 59.5. Additionally, if you’re taking a distribution from a qualified account, there is no mandatory 20% withholding rate for federal taxes.

Important note – it’s generally not advised to pull retirement assets or deplete them if you do not have to. Please contact a financial advisor prior to making withdrawals to determine if it’s your best course of action.

4. 401(K) Loans

The CARES Act made it possible to borrow up to $100,000 or 100% of your vested account balance. Prior to this legislation, the maximum loan amount was $50,000 or 50% of your vested account balance. The federal government is expanding the limits in an effort to allow people to access their funds and recover from the economic downturn.

Additionally, all loan payments due between March 27th and December 31, 2020 can be deferred for up to one year and payments do not need to be made.

Important note – your 401(K) plan needs to have certain amendments in place to allow for a 401(K) loan. Not all plans allow for participant loans. Please contact your 401(K) provider prior to making any decisions.