Need To Access Your Retirement Funds Due To Coronavirus? Here's how!Submitted by The Blueprint 360 | Financial Clarity Within Reach on April 15th, 2020
CARES ACT - Special Distribution and Student Loan Rules
It’s safe to say that the coronavirus has disrupted life as we know it over the past few weeks. Millions of Americans have already lost their jobs and many more have experienced a reduction in income. Although the road to recover will be long, I am encouraged by the efforts the Federal Government and the Federal Reserve have taken to stabilize the economy and bring us back to normalcy.
In the weeks and months to come, some of you might find yourself on hard times and need access to cash. If that happens, know that I am here to assist. This post concludes my review of the major provisions under the CARES ACT and highlights the special retirement plan and IRA distribution rules under it.
I have also included a summary of the student loan provisions under the law. This is a section that you want to read if you have federal student loans. As always, review the areas that pertain to you and share with a friend where appropriate.
Cash Distributions from Qualified Accounts:
This provision of the law allows individuals impacted by the Coronavirus to withdraw up to $100,000 from IRA’s, employer-sponsored retirement accounts, or a combination of both in 2020 if they:
- Have been diagnosed with COVID-19
- Have a spouse or dependent diagnosed with COVID-19
- Have experienced adverse financial consequences as a result of a being laid off, furloughed, quarantined, or had work hours reduced because of the disease
- Are unable to work because they lack childcare as a result of the disease
- Own a business that has closed or operates under reduced hours because of the disease, or
- Meet some other reason
Unlike distributions from qualified accounts under normal circumstances, Coronavirus Related Distributions come with some special tax benefits as outlined below.
- Exempt from the 10% penalty – Individuals under the age of 59 ½ may access retirement funds penalty free.
- Not subject to the mandatory withholding requirement – The normal 20% tax withholding on distributions are waived. You pay taxes on your distribution when you file your taxes.
- Eligible to be repaid over three years – You can avoid taxes on the distribution altogether if you put the money back within three years.
- Income may be spread over three years – By default, the cash received is reported as income evenly over 2020, 2021 and 2022. However, you can elect to include all the income in 2020.
Loans from qualified accounts:
If you don’t like the idea of taking a distribution from your qualified account, consider taking a loan. With the enhancements to the general loan provisions under the CARES Act, this option has become more attractive.
Individuals impacted by the Coronavirus can now borrow 100% of their account balance up to $100,000. This option is not available under all plans so check with your employer to familiarize yourself with plan rules.
Generally, loans must be paid back in 60 months and carry an interest rate less than 5%. Most importantly, loan payments may be delayed for up to one year.
Relief for Student Loan Borrowers:
Under the CARES Act, student loan payments are deferred until September 30th. This does not happen automatically and only applies to federal student loans. To take advantage of this benefit, you will need to contact your student loan provider to request deferment.
If you are pursuing student loan forgiveness under programs like Public Student Loan Forgiveness, I strongly encourage you to contact your loan provider and suspend payments immediately because this six-month grace period will still count towards any loan forgiveness period.
In addition, employers now have the option to exclude student loan repayment from compensation. In general, amounts paid by employers to an employee used to pay student debt are taxable as income. However, under the CARES Act, up to $5,250 of student loan repayment can be excluded. If you are currently receiving student loans or tuition reimbursements from your employer, I encourage you to discuss this provision with them.
Other Benefits Worth Mentioning
- Required Minimum Distributions - Required Minimum Distributions are waived during 2020. This applies to all individuals regardless of whether or not they were directly impacted by coronavirus. If you have already received your 2020 distribution and don’t need it, you may simply return it. This provision of the law applies to IRA’s, employer sponsored accounts such as 401(k) and 403(b)’s, and beneficiaries receiving stretch distributions.
- HAS Qualified Expenses - The definition of qualified medical expenses, for the purposes of Health Savings Account (HAS’s), Medical Savings Account (MSA’s) and Flexible Spending Account (FSA’s) is expanded to include over the counter medications, including women menstruation products.