CARES Act provides for waiver of Required Minimum Distributions
CARES Act provides for waiver of Required Minimum Distributions and penalty free withdrawals from retirement accounts. The Coronavirus Aid, Relief, and Economic Security Act (aka the CARES Act) contains several provisions that cover retirement accounts that we, at Kenneth Freed & Co., want to bring to your attention.
Required Minimum Distributions Waived for 2020:
Required Minimum Distributions, commonly referred to as RMDs, have been suspended for tax year 2020. Prior to the CARES Act, individuals that reached 70 1/2 before end of 2019 were required by law to take retirement distributions from their IRA, SIMPLE IRA, SEP IRA, or other qualified retirement plans such as a 401(k). Provisions in the CARES Act have waived the RMD requirement for retirees for 2020, including inherited IRAs. Additionally, those retirees that turned 70 1/2 during 2019 and chose to delay taking their RMD until April 1, 2020 can defer until 2021.
This provision in the CARES Act is a tremendous benefit due to the substantial losses sustained in retirement accounts related to stock market decline since beginning of 2020. Postponement of RMDs for 2020 allows retirees the opportunity to avoid liquidating substantially devalued securities to cover the RMD withdrawals while giving the financial markets a chance to recover incurred losses before RMDs are required in 2021.
Even though the RMD requirement has been waived for 2020, there is no restriction on taking distributions by taxpayers that would otherwise qualify under normal distribution rules. Taxpayers that rely on distributions or taxpayers that want to take distributions are not prohibited from taking distributions. Also, there are circumstances where taking distributions in the current economic environment may make sense.
Penalties Waived and Favorable Tax Treatment of Retirement Distributions:
One of the many provisions in the CARES Act is the waiver of certain penalties for withdrawing from certain qualified retirement accounts. The CARES Act will allow individuals to withdraw up to $100,000 from in individual retirement account (IRA) or 401(k) plan without penalty even if you are younger than 59 1/2 years old. To qualify for the favorable tax treatment, you must have a Coronavirus Related Distribution.
What is a Coronavirus Related Distribution?
Answer: Any distribution from an eligible retirement plan made on or after January 1, 2020 and before December 31, 2020 to an individual -
Who is diagnosed with the virus SARS CoV-2 or with coronavirus disease 2019 (Covid-19) by a test approved by the Centers for Disease Control and Prevention;
Whose spouse or dependent is diagnosed with such virus or disease by such a test, or
Who experiences adverse financial consequences as a result of being quarantined, being furloughed or laid off or having work hours reduced due to such virus or disease, being unable to work due to lack of child care due to such virus or disease, closing or reducing hours of a business owned or operated by the individual due to such virus or disease, or other factors as determined by the Secretary of the Treasury.
If you qualify for a Coronavirus Related Distribution and take a distribution from your retirement account, the taxable income can be spread out ratably over three years, beginning with tax year 2020. Qualifying Coronavirus Related Distributions will be classified as a rollover and can avoid taxation entirely if fully recontributed within the same three year period. Filing amended individual income tax returns may be required if income is reported ratably in years one and two and then recontributed in year three.
Caution: We are still waiting on the IRS to provide additional qualifications and guidance related to the Coronavirus Related Distributions. One significant UNKNOWN CONSEQUENCE related to Coronavirus Related Distributions is how Massachusetts or other states will treat these distributions.