The $2 trillion stimulus bill that has passed the Senate makes three big temporary changes to retirement savings. Two would make it easier for people with a coronavirus-related hardship to tap their retirement accounts for short-term needs this year; the other would let people who are required to take money from their accounts, but don’t want to, skip their required minimum distribution for 2020.
The bill, known as the CARES Act, is awaiting passage in the House. Here are the details:
For those in need of money, the bill would let employers increase the maximum loan amount from 401(k), 403(b) and 457 plans to $100,000 from $50,000 for this year only. Employers are not required to increase the loan amount, or to offer loans at all. In addition, employees who have loans from a 401(k)-type plan and have a payment due this year could extend the due date by one year.
Second, the bill would let people with a coronavirus-related hardship withdraw up to a total of $100,000 from their IRAs, 401(k) or other workplace plans this year and instead of including the entire amount in their 2020 income, they could spread the income — and the federal and state tax on it — evenly over three years.
If they return the money to the IRA within three years, they can file an amended return to recoup the tax they paid. And if they are younger than 59½, they won’t have to pay the usual 10% penalty on early withdrawals, regardless of whether they put the money back into the IRA.
To qualify for either tax break, you, your spouse or dependent must be diagnosed with the SARS-CoV-2 coronavirus or the disease it causes (COVID-19) or experience a financial consequence as a result of being quarantined, furloughed, laid off or having your work hours cut, being unable to work because of lack of child care or having to close or reduce the hours of your business.
“It’s going to be really difficult not to qualify,” said Jamie Cox, managing partner with Harris Financial Group. However, “You should not take money out of your retirement account and go on vacation. The intended purpose is a bridge between where you are and where you should be once this is over.”
Also, if you expect your income to be abnormally low this year, it could make sense to include the entire distribution in this year’s income, rather than spread it out over three years.
The third provision applies to everyone who is required to take a minimum distribution from their IRAs and 401(k)-type plans each year, either because they are at the age when distributions must begin or they have an IRA inherited from someone other than a spouse.
The bill suspends the required distribution for 2020. The rationale: The amount of your distribution is based on your age and the value of your account on Dec. 31 of the previous year. Because the stock market has fallen precipitously since the end of 2019, “if not for this waiver, you may have to take out a larger portion of your IRA and pay tax on value that no longer exists,” said IRA guru Ed Slott.
This rationale assumes the market won’t recover by year end, but that’s another story.
In response to the 2008 stock market crash, the government waived required minimum distributions for all of 2009.
What if you have already taken your distribution for 2020? At the moment, you can’t put it back.
The law does not let you return required distributions to your IRA or 401(k). If you have taken out more than your required distribution, the excess counts as a regular distribution, not a required distribution.
Under current law, you can return a regular distribution to your account within 60 days, as long as you have not done a rollover within the past 12 months. (Moving a retirement account from one trustee to another without taking possession of the money is not a rollover.)
If the bill passes as is, then whatever you took out for this year would count as a regular withdrawal, not a required distribution, and you could return it to your retirement account within 60 days, as long as you haven’t done an IRA rollover within the past 12 months, Slott says.
If 60 days have already passed since you took your 2020 distribution, it’s possible — maybe even likely — that the IRS will grant blanket relief to everyone, as it did in 2009.
Just don’t count on it, yet.