The historic $2 trillion coronavirus relief package passed unanimously by the Senate and signed into law by President Trump on March 27 contains a wide range of provisions in its 880 pages, including some significant temporary exclusions involving people’s retirement accounts.
To help those impacted by the economy-crippling COVID-19 crisis, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) allows people to withdraw up to $100,000 from their IRAs and 401(k)s with no tax penalties for three years and waves the usual 10% withdrawal fee for those younger than 59½.
“The new law increases the dollar amount you can loan yourself from your own 401(k) from $50,000 to $100,000 and also creates a penalty-free early distribution rule whereby IRA or 401(k) account owners under age 59-and-a-half can take a penalty-free retirement account distribution of up to $100,000,” Mat Sorensen explains in a piece for Entrepreneur.
So long as individuals repay their IRAs within three years of the withdrawal date, there will be no tax liability. “You can repay all or a portion of the distribution within three years, and the repayments will not be counted toward the annual contribution limits,” Washington Post Columnist
“In effect, the CVD drill allows you to borrow up to $100,000 from your IRA(s) and repay the amount(s) any time up to three years later with no federal income tax consequences,” MarketWatch‘s Bill Bischoff explains. “And there are no limitations on what you can use [coronavirus-related distribution] funds for during the three-year period.”
The exemption is retroactively effective as of Jan. 1, 2020 and lasts through Dec. 31, 2020.
The usual 10% penalty for withdrawals imposed on those younger than 59½ is also waved for this year.
As explained by Singletary, the bill also suspends required minimum distributions (RMDs) for 2020 for those 72 and older. “Additionally, the waiver covers the first RMD, which individuals may have delayed from 2019 until April 1, according to a summary of the Act’s provisions by Fidelity Investments,” she notes.
So who qualifies for the exemptions? As Bischoff details, the exemptions apply to anyone
- who is diagnosed with COVID-19 by a test approved by the Centers for Disease Control and Prevention.
- whose spouse or dependent (generally a qualifying child or relative who receives more than half of his or her support from you) is diagnosed with COVID-19 by such a test.
- who experiences adverse financial consequences as a result of being quarantined, furloughed, laid off, or having work hours reduced due to COVID-19.
- who is unable to work because of lack of child care due to COVID-19 and experiences adverse financial consequences as a result.
- who owns or operates a business that has closed or had operating hours reduced due to COVID-19 and has experienced adverse financial consequences as a result.
- who has experienced adverse financial consequences due to other COVID-19-related factors to be specified in future IRS guidance.
Along with the temporary retirement exemptions, the bill provides a series of sweeping provisions designed to help Americans and businesses make it through this unprecedented economic upheaval. One of those provisions is direct payments to Americans of $1,200 per individual ($2,400 for married couples), and an additional $500 for dependents, for those who make up to $75,000 individually and couples that make up to $150,000. The distribution reduces and phases out entirely for those earning “more than $99,000; head-of-household filers with one child, more than $146,500; and more than $198,000 for joint filers with no children,” as Politico explains.