The CARES Act provisions offer expanded access to retirement accounts for individuals. For clients who may be considering taking advantage of either of these provisions, it’s important to help them look at the potential impact on their retirement.
Retirement Plan Distributions
The CARES Act allows individuals to withdraw up to $100,000 from a retirement plan such as their 401(k) or an IRA without a penalty if they are under age 59 ½. In order to take advantage of this, your client will need to document how they have been impacted by COVID-19. This could be via a diagnosis of COVID-19 for your client, their spouse or a family member. It could also include a financial hardship, such as reduced earnings due to the impact of the pandemic.
The waiver of 10 percent penalty is retroactive to the beginning of 2020. The distributions will still be taxable, but the tax can be spread over the next three tax years, and your client will be allowed to “recontribute” the money back into their account to avoid some or all of the tax.
The CARES Act has also allowed 401(k) plan sponsors to raise the limit on outstanding loans from a maximum of $50,000 or 50 percent of the participant’s balance to $100,000 or 100 percent of the participant’s balance. Repayment rules have been liberalized, including those on loans currently outstanding.
Note both the plan distributions from employer-sponsored plans, as well as the 401(k) loan provisions need to be adopted by plan sponsors.