Byline: Michael J. Simolo
The federal government recently enacted the Coronavirus Aid, Relief, and Economic Security (CARES) Act as one part of its response to the economic consequences of the ongoing coronavirus pandemic. This post will discuss certain provisions in the CARES Act relating to Individual Retirement Accounts (IRAs). Essentially, the legislation provides an option for individuals to leave funds in their IRA or to take funds out of their IRA in ways that would have otherwise resulted in penalties before the passing of the CARES Act.
IRA Basics and Background
Before discussing these provisions, a small bit of background. IRAs make excellent savings vehicles because they grow tax-free, resulting in higher growth of the assets in those accounts over time. Eventually, though, the IRS wants to collect tax on those assets, and imposes Required Minimum Distributions (RMDs) on IRAs once the account owner reaches age 72. At that age, an IRA owner must begin to withdraw funds from the IRA, pursuant to a formula. Any funds withdrawn from an IRA must be reported as taxable income on the owner’s tax return.
An IRA owner can withdraw funds from an IRA at any time, but doing so before age 59½ can result in significant tax penalties.
How the CARES Act Changes the Rules
The CARES Act eases both of these restrictions. First, with regard to leaving funds in IRAs, the Act provides that any individual who would otherwise have to take an RMD in 2020 may choose not to do so—thereby leaving the funds in the account to grow tax-free for another year. Anyone who took a distribution from an IRA prior to the CARES Act may recontribute it to the account if they do so within 60 days of the withdrawal. Unfortunately, this means that IRA owners who took their 2020 RMDs at the beginning of the year have lost the ability to take advantage of this provision.
Second, with regard to taking funds out of IRAs, the CARES Act provides that owners “impacted by the coronavirus” may withdraw up to $100,000 from their retirement plan without paying any tax penalty. The owner would also have the option to stretch the income tax due on the withdrawn amount through 2022.
The types of owners deemed impacted by the coronavirus is broad under the Act, and includes, but is not limited to: individuals diagnosed with (or whose spouse or dependent is diagnosed with) COVID-19 by a test approved by the Centers for Disease Control and Prevention (CDC); those who experience loss of a job, furloughing, or reduced hours; those who are unable to work due to lack of child care; those who own or operate a business that has had to reduce operations or close; or those who have experienced other “adverse financial consequences” to be determined in future guidance, all as a result of the coronavirus pandemic.
For additional information on these or any other provisions of the CARES Act, please contact our office at (413) 732-2301.